RBNZ Confident In Hitting Inflation Targets

The New Zealand dollar had a notable drop yesterday afternoon, falling about 0.6% against both the US dollar and the Australian dollar. 

This movement brought the NZD/USD pair close to the 0.6000 support level and pushed the AUD/NZD pair up towards 1.1100. 

This shift was largely due to the Reserve Bank of New Zealand’s (RBNZ) latest policy update, which showed a more relaxed policy approach.

In their latest statement, the RBNZ emphasized that their tight monetary policy has significantly reduced consumer price inflation. They now expect inflation to return to their target range of 1 to 3 percent in the latter half of the year. 

This faster-than-expected decline is due to falling domestic price pressures and lower costs for imported goods and services. A weakening job market has also helped reduce domestic inflation, as businesses are hiring less cautiously. 

Additionally, increased immigration has expanded the labour supply, easing labour market conditions.

The RBNZ’s confidence in continued inflation reduction is supported by signs of easing inflation persistence, aligning with reduced capacity pressures and business pricing intentions. 

The central bank’s tight policy is also slowing economic activity, including business and consumer investment and spending. Given these factors, the RBNZ believes its restrictive policy is effectively curbing growth and inflation. 

They adjusted their guidance to suggest that the extent of monetary restraint will ease over time, matching the expected decline in inflation pressures.

This updated policy guidance has boosted market confidence that the RBNZ will start lowering rates later this year, contrasting with their May guidance, which suggested rate cuts in the second half of next year. 

However, there is a possibility that the market is prematurely pricing in earlier and deeper cuts. 

Today’s more lenient policy update has also widened the gap between the RBNZ and the Reserve Bank of Australia (RBA), which is considering further rate hikes over the summer. This difference poses potential upside risks for the AUD/NZD.

Market commentary from Luca Santos, market analyst at ACY Securities 

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