Central bank expected to maintain OCR
The key event in New Zealand this week is the Reserve Bank’s (RBNZ) latest policy review, with the decision to be announced at 2pm on Wednesday.
It is anticipated that the OCR will remain at 5.5%, with guidance continuing to emphasise that “monetary policy needs to remain restrictive to ensure inflation returns to target within a reasonable timeframe.”
Consistency in RBNZ’s approach
The overall tone of the RBNZ’s communication is expected to mirror that of May, when the bank pushed out the timing of its first policy easing to August next year.
“The RBNZ kept the cash rate unchanged at 5.50% for the seventh meeting in a row,” said Kelly Eckhold (pictured above), Westpac chief economist. “But everything from their tone, forecasts, and updated OCR track, was more hawkish than expected.”
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Upcoming data releases to influence policy
Several important data releases lie ahead, notably the Q2 CPI and labour market reports. RBNZ will want to see this data before contemplating any change in stance.
“The August monetary policy statement meeting will see the RBNZ present updated projections for the economy and a refreshed track for the OCR,” Eckhold said.
This would be the more likely time for communicating any shift towards a less hawkish stance.
Impact of fiscal and economic developments
The RBNZ will update its view on fiscal risks now that the budget is public. Despite the budget being slightly less contractionary than expected, the RBNZ is likely to maintain a hawkish perspective.
“We anticipate the RBNZ will continue to retain a hawkish perspective with respect to fiscal risks,” Eckhold said.
Economic indicators and forecasts
Recent data suggested that the New Zealand economy has likely contracted during the June quarter.
“Recent data pertaining to the June quarter has been very soft – indeed suggesting that the economy has likely contracted during the quarter,” Eckhold said.
Weakness in the labour market and investment outlooks were highlighted in the NZIER QSBO survey, with many firms reporting a lack of demand as the biggest constraint on output.
Inflation and pricing trends
On the pricing side, short-term inflation forecasts remain in line with the RBNZ’s expectations. Partial monthly CPI data suggests the Q2 CPI will match the RBNZ’s May forecast of 0.6%.
“House prices have been flat recently and might have some modest downside risks in the RBNZ’s forecasts given recent trends,” Eckhold said.
Inflation pressures are receding but remain elevated, with the RBNZ needing to see these trends reflected in the upcoming quarterly CPI prints.
Market expectations
Market participants do not anticipate a dovish tilt that would support recent market pricing.
“We don’t think the markets will get a dovish tilt that supports recent market pricing,” Eckhold said.
Key data releases this week
In addition to the RBNZ’s policy review, several data releases this week will influence the policy outlook. These include Statistics NZ’s Selected Price Indexes for June, updates on migrant and tourist flows, consumer spending news, and the latest manufacturing PMI.
The REINZ housing report for June will also be closely watched for signs of market activity.
As the RBNZ prepares for its policy review, the focus will be on how recent economic developments and upcoming data releases influence the bank’s stance on monetary policy.
Read the Westpac commentary in full.
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