At its meeting tomorrow, the Reserve Bank of New Zealand is widely expected to raise the Official Cash Rate by 50 basis points taking the cash rate to 3%. It will be the RBNZ’s fourth consecutive 50bp hike in a tightening cycle that started in October.
Last month the RBNZ pledged its “commitment to ensure consumer price inflation returns to within the 1 to 3 percent target range” and said that it would continue to raise rates at a “pace to maintain price stability,”
Despite a slight increase in the unemployment rate to 3.3% in Q2, the labour market remains tight beyond the “maximum sustainable” level and inflation at 7.3% y/y is miles above target. The RBNZ will likely revise higher its inflation forecasts and reiterate its forecast for a terminal rate of 3.9% by mid-2023.
Aside from inflation, there is evidence that the RBNZ’s tightening cycle is impacting. The REINZ House price index fell 3% compared to July last year, for the first annual fall in house prices since 2011. Elsewhere consumer and business confidence has plunged as households face higher mortgage repayments.
While the RBNZ may have taken some comfort in the softer than expected U.S inflation numbers last week, as well as evidence that shipping costs and commodity and energy prices have eased, the RBNZ will want to see inflation turn lower before they take their foot off the monetary tightening pedal.
Turning to the currency, the NZDUSD surged 3.4% last week to close above .6450 for its best week since June 2020. However, following the latest bout of dour Chinese economic data released yesterday, the NZDUSD has given back just under half of those gains to be trading at .6358.
Yesterday’s reversal lower from the .6469 high, has thus far held initial support at .6350. Below here there is a layer of medium-term support between .6300c and .6200c, which we expect to hold if tested, looking for rotation higher to the June .6576 high.
Source Tradingview. The figures stated are as of August 16th 2022. Past performance is not a reliable indicator of future performance. This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation