As expected, the Reserve Bank of New Zealand (RBNZ) kept its Official Cash Rate (OCR) at 5.50% for the eighth consecutive meeting in a row in May.
What traders didn’t expect was for the central bank to share that “The Committee discussed the possibility of increasing the OCR at this meeting” after considering the “persistent domestic inflation, weaker productivity growth, and uncertainty regarding the pace of normalisation in wage and price-setting behaviour.”
Link to RBNZ May 2024 Policy Decision press release
The highlights of the central bank’s May 2024 projections further supported its hawkish biases:
- Official cash rate is set to peak at 5.7% in December compared to 5.6% in its February projections
- We still won’t see an interest rate cut until Q1 2025
- Inflation projections were revised higher for Q2 (3.2% to 3.6%), Q3 (2.6% to 3.0%), and Q4 (2.5% to 2.9%) this year and all quarters of 2025
- Inflation won’t hit RBNZ’s 2% goal until Q2 2026, later than the Q4 2025 projection in February
- Growth projections were revised lower for all quarters in 2024 and 2025
Link to RBNZ May 2024 economic projections
In its statement, RBNZ also noted that labour market pressures have eased as net inward migration helped with supply while businesses were more cautious in hiring.
Weaker capacity pressures and easing labour market are also reducing domestic inflation, but their impact may be limited as the decline is tempered by price increases in sectors that are less sensitive to interest rates such as dwelling rents, insurance costs, and other domestic services prices.
For now, RBNZ members agreed that interest rates “may have to remain at a restrictive level for longer than anticipated in the February Monetary Policy Statement.”
Market Reactions
New Zealand Dollar vs. Major Currencies: 5-min
Overlay of NZD vs. Major Currencies 5-min Forex Chart by TradingView
Expectations of a “hawkish hold” event from the RBNZ pushed the New Zealand dollar slightly higher shortly before the report’s release.
NZD then spiked higher across the board when the central bank’s revised projections reflected higher interest rates, higher inflation, and a “higher for longer” interest rate environment.
The bullish upswing didn’t last, however, as the New Zealand dollar soon gave up part of its gains in the next hour or so after the release.
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