NZD Stays Subdued as RBNZ Inflation Expectations Ease in Q3

The New Zealand dollar remained under pressure on Tuesday after the Reserve Bank of New Zealand’s two-year inflation expectations eased in the third quarter, reinforcing market bets on potential rate cuts later this year.

RBNZ Inflation Expectations Dip in Q3

The RBNZ’s latest survey, released this week, showed that two-year inflation expectations fell to 2.3% in Q3, down from 2.5% in the previous quarter. This move brings expectations closer to the central bank’s 1-3% target band, suggesting that price pressures are moderating as the economy cools.

The decline aligns with recent data showing softer GDP growth and a softening labor market, which have prompted economists to predict that the RBNZ may begin cutting its official cash rate (OCR) as early as November. Currently, the OCR stands at 5.5%, a level held since May 2023.

Market Reaction and NZD/USD Performance

Following the release, the New Zealand dollar traded around $0.5850 against the U.S. dollar, down 0.3% on the day. The currency has struggled to gain traction as the U.S. dollar remains firm on expectations that the Federal Reserve will keep rates higher for longer.

According to Reuters, the kiwi has fallen about 5% over the past three months, reflecting both domestic and external headwinds. Traders are now pricing in a 70% chance of a rate cut in November, up from 50% a month ago, according to overnight index swaps.

What This Means for Borrowers and Businesses

For New Zealand households and businesses, lower inflation expectations could signal relief ahead. If the RBNZ begins easing, mortgage rates may start to decline, easing cost-of-living pressures. However, a weaker NZD also raises import costs, which could offset some benefits.

Expert Insights and Outlook

Economists at ANZ Bank noted that the survey results are consistent with their view that the RBNZ will cut rates in November, though they caution that the central bank will need to see continued moderation in inflation data before committing to a move.

Meanwhile, analysts at Westpac expect the NZD to remain under pressure in the near term, with support seen around $0.5800. A break below that level could open the door to further declines, while resistance is expected at $0.5900.

Conclusion

The easing of RBNZ inflation expectations in Q3 adds to the case for monetary policy loosening, but the New Zealand dollar’s trajectory will depend on both domestic data and global factors, particularly the U.S. dollar’s strength. Investors should watch upcoming GDP and inflation prints for clearer signals.

FAQs

Q1: What are RBNZ inflation expectations?
RBNZ inflation expectations are a survey of businesses and households measuring their expectations for future inflation. The two-year measure is closely watched by the central bank as a leading indicator for policy decisions.

Q2: How does the easing of inflation expectations affect the NZD?
Lower inflation expectations increase the likelihood of interest rate cuts, which typically weakens a currency because lower rates reduce foreign investment appeal. This has contributed to the NZD’s recent decline.

Q3: When might the RBNZ cut interest rates?
Markets are currently pricing in a 70% chance of a rate cut in November 2024, but the RBNZ has not confirmed any timeline. The decision will depend on incoming economic data, especially inflation and employment figures.