RBNZ risks lean in favour of a pause
Aug 13 (Reuters) -The RBNZ policy decision on Wednesday is shaping up to be one of the more exciting of recent times. The market is currently pricing a 75% chance of a 25bps rate cut, in contrast to the 61% of economists polled by Reuters who expect the official cash rate to be left unchanged at 5.5%.
With the decision too close to call, there is room for the Kiwi to react on either outcome.
Data since the July meeting has been mixed. Headline inflation fell to 3.3%, which marks a 0.3ppt undershoot of the RBNZ’s May projections. Two-year inflation expectations are at the mid-point of the bank’s 1-3% target range but non-tradeables CPI – domestic inflation – is slightly higher than the central bank expected, at 5.4%.
The unemployment rate, meanwhile, has risen to 4.6% from 4.3% in the prior quarter, in line with the RBNZ's forecast.
Few doubt the RBNZ will signal an earlier rate cut than previously forecast; the question is whether there is enough data to justify bringing forward that cut by 12 months.
Recall that the prior meeting was particularly dovish, with policymakers signalling that the time to lower rates was nearing.
With central banks globally now cutting interest rates and the Federal Reserve likely to move in September, the bar to ease policy has been lowered.
With domestic inflation providing a slight hawkish surprise relative to the RBNZ’s forecast, risks lean in favour of a pause but the decision is finely balanced.
On the option front, overnight NZD/USD implied volatility has doubled to 22 vols – now at its highest level since March 2023 – signalling an implied move of 56pips in either direction, though it is important to note that the option will also account for the U.S. CPI event risk.
For AUD/NZD, overnight implied volatility has tripled to 18.1, which points to an 84pip move in either direction.
For more click on FXBUZ
Data vs RBNZ forecast https://tmsnrt.rs/3Ane9Cg
NZ inflation data https://tmsnrt.rs/4dFcztY
(Justin McQueen is a Reuters market analyst. The views expressed are his own.)
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