RBNZ walks tightrope as clouds form over New Zealand economy

RBNZ walks tightrope as clouds form over New Zealand economy

Kiwi dollar may weaken if RBNZ trims GDP growth forecasts but maintains Cash Rate as US/China trade war continues

Reuters analysts expect the Reserve Bank of New Zealand (RBNZ) to hold rates at its meeting on August 9. The current rate is 1.75% and all 16 economists polled by Reuters agreed. In fact, 15 of the 16 economists believe that the RBNZ will keep rates steady into 2019. However, most of them who looked beyond the first quarter see rates increasing by the end of 2019.

Bloomberg’s analysts share the same outlook following a poll of 16 economists. However, the bank’s forecasts on growth, inflation and interest rates will be under scrutiny for clues on its future direction.

Escalating trade tensions between the US and China are likely to have an ongoing effect on the NZ dollar. New Zealand and China are major trading partners and US trade retaliations could drive the price action. Traders can expect NZD/USD to weaken on August 9.  The RBNZ announcements are likely to highlight the bearish divergence with the hawkish US Federal Reserve.

ANZ Bank New Zealand senior macro strategist Phil Borkin said, “the global vibe in general” is being taken into account. He pointed to the ongoing trade tensions between the US and China as the main reason.

On Monday (Aug 6) The kiwi traded at 4.5998 Chinese yuan from 4.6054 yuan. This reflected the markets’ reaction to the People’s Bank of China reintroducing a 20% reserve requirement for foreign exchange forwards.

That makes it more expensive for traders to take a short position on the yuan, predicting the currency will depreciate and can be bought back at a cheaper price.


The NZ central bank has been on hold since November 2016 and signalled the next move could go either way. Its forecasts show the Overnight Cash Rate rising to 1.9% in September 2019 from a current 1.8%. A full rate increase is on the cards by March 2020 when the benchmark rate is forecast to be 2%.

“The economy has been sending out contradictory signals for monetary policy as it so often does – growth is slowing, but inflation is picking up. We expect that these positives and negatives will roughly offset one another in the Reserve Bank’s deliberations, meaning that it will stay on roughly the same course as it charted in May,” said Westpac Banking Corp chief economist Dominick Stephens.

Stephens believes there is strong evidence of a cooling economy as everything from business confidence to consumer spending has slowed. He expects the central bank to have to trim growth forecasts which “will be a powerful argument against official cash rate hikes.”

In July, business confidence fell to the lowest level since June 2008 and ANZ’s consumer confidence index is down to an almost two year low.

In the latest monetary policy statement, the RBNZ tipped growth to accelerate from 2.9% in the March quarter to 3.3% in March 2019 before easing to 3.2% in the March quarter of 2020. However, growth in March was only 2.7% on the year.

Paul Dales, chief Australia and New Zealand economist for Capital Economics, said the economic backdrop means the bank may signal rates will be on hold for even longer.


“Recent developments have supported our view that both the financial markets and the RBNZ may have to push back their expectation of when interest rates will first rise,” he said.

Dales said the overseas backdrop is a bit softer and “more importantly, the latest evidence suggests that the domestic economy has lost more momentum.”

He expects the central bank to revise down its gross domestic product forecasts. Still, that doesn’t mean that the Reserve Bank will seriously start considering whether interest rates need to be cut. However, “the weaker growth outlook does mean that the RBNZ may conclude that the first interest rate hike is a little further away.”

ANZ Bank New Zealand said rising inflation is mostly driven by minimum wage increases, tax changes, and higher oil prices.

Chief economist Sharon Zollner said the central bank “can accommodate such cost-push disturbances, provided inflation expectations are well anchored, implying the effects will dissipate.” As these inflationary factors are one-offs, expectations appear to be anchored, she said.

She expects the central bank to repeat their recent neutral messaging, despite a rate cut looking less likely. “Core inflation has increased but downside risks have not gone away. Should these materialise, a cut would be firmly on the table,” she said.

Zollner added that the RBNZ will want core inflation closer to the midpoint of the target band before a hike is up for consideration, particularly given the softer activity outlook.

For advice on how to take advantage of trading opportunities with the NZ dollar, talk to the experts at FXB. We make it easy to start earning a second income with smart investments in the markets.

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