Traders split on policy directions
Wellington has captured traders’ attention, with one eye on the Reserve Bank’s monetary policies and the other on imminent fiscal announcements, creating a charged financial atmosphere, according to Kiwibank.
Central banks’ diverging paths
Last week, the focus was on the Reserve Bank of Australia (RBA) and the Bank of England (BoE) policy meetings. While both central banks kept their policy settings unchanged, their tones diverged. The BoE indicated potential for rate cuts as early as next month, aligning with their inflation target goals.
“The BOE indicated a clear path ahead for rate cuts, acknowledging that inflation continues to fall towards their 2% target,” said Kiwibank’s Jarrod Kerr, Mary Jo Vergara, and Sabrina Delgado (pictured above, left to right).
In contrast, the RBA was more cautious, emphasising the need for more time to ensure inflation stability within its target range.
“The RBA were less hawkish than market traders had feared,” Kerr, Vergara, and Delgado said.
New Zealand’s pre-Budget fiscal concerns
As New Zealand gears up for the Budget 2024 announcement at the end of the month, the government’s financial statement for the nine months to March highlighted fiscal challenges.
Tax revenues fell short of forecasts, with corporate tax $1.7 billion below expectations and GST receipts $0.3 billion short, reflecting subdued consumption.
“Core Crown tax revenue came in (well) below prior forecasts, again,” the Kiwibank economists said, pointing to a weakening fiscal starting point ahead of the budget.
Upcoming RBNZ policy decision
Attention now turns to the Reserve Bank of New Zealand’s (RBNZ) next policy decision, expected to be a major event with the release of a full monetary policy statement (MPS). This extensive review will provide updated economic forecasts and a revised outlook on the OCR.
“Instead of a one-page statement, we’ll get at least 50 pages of the RBNZ’s latest views,” the Kiwibank economists said.
Recent data showed mixed signals, with some inflationary pressures remaining sticky, complicating the path to the RBNZ’s 2% inflation target.
Employment and economic outlook
The employment landscape also presents challenges, with the unemployment rate rising to a three-year high of 4.3%, and sluggish employment growth indicating potential headwinds for the economy.
“The continued easing in wage pressures, with annual wage inflation slowing to 3.8%, moving further away from the 2021 peak of 4.5%,” the economists said.
Inflation expectations and monetary policy
Analysts anticipate a modest inflation decline, reflecting ongoing domestic concerns.
“Ultimately the data to date should not sway the RBNZ far from their stance in February,” the Kiwibank economists said, suggesting a possible early start to rate cuts if inflation trends favorably into the September quarter.
View the full Kiwibank report.
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