The New Zealand dollar, paired with the US dollar, demonstrates a combative attitude ahead of the upcoming meeting of the Reserve Bank of New Zealand. In just two days, on May 24, the RBNZ members will announce the outcome of their meeting. According to most experts, the central bank will increase the interest rate again, but this time only by 25 basis points. The macroeconomic reports preceding the May meeting depict a somewhat conflicting picture. Therefore, the "dovish" scenario cannot be ruled out, although its realization is less likely.
Inflation is slowing down
First and foremost, it is necessary to recall that during its previous meeting (held in early April), the RBNZ surprised investors with its hawkish decision to raise the interest rate by 50 basis points. Commenting on this move, the regulator stated that the Committee members had discussed raising the rate by 25 or 50 basis points. However, in the end, the scales tipped in favor of the more hawkish scenario "given that inflation remains too high and persistent."
Considering this disposition, particular attention should now be paid to the inflation reports published after the April meeting. In my opinion, these releases will determine the "degree of hawkishness" of the RBNZ.
So, what do the latest inflation reports say? Essentially, they indicate one thing: inflation in New Zealand is slowing down at a significant pace. It is known that the consumer price index in the first quarter decreased to 6.7% annually, marking the slowest growth rate in the past year (the index dipped below this level only in the fourth quarter of 2021). Most analysts had predicted a more modest decline to 7.1%. For comparison, in the fourth quarter of 2022, the index stood at 7.2%. In quarterly terms, the consumer price index also entered the "red zone," dropping to 1.2% in the first quarter against a forecasted growth of 1.5%.
Moreover, the key data on New Zealand's labor market growth, published in early May, reflected a decline in wage indicators. The wage component was the only "New Zealand Nonfarms" component that ended up in the red zone. All other indicators, on the contrary, performed better than expected. For example, private sector wages increased by 0.7% in the first quarter (including bonuses), with a forecasted growth of 1.1%. The downward trend has now been observed for the second consecutive quarter. Excluding bonus payments, the wage indicator demonstrated a similar trend, with a growth rate of 0.9% against a forecasted growth of 1.2%. In this case, the downward trend in the inflationary indicator has been recorded for the third consecutive quarter.
It is worth noting that reports on the growth of the consumer price index in New Zealand are published quarterly, so the RBNZ members will be working with the figures mentioned above at the May meeting. The next inflation release is expected in July.
Outlook for the May meeting of the RBNZ
Against the backdrop of slowing inflation, hawkish expectations for the outcome of the May meeting of the RBNZ have weakened: most experts are confident that the regulator members will not "wave the sword."
For example, at the end of last week, Reuters journalists surveyed over two dozen economists, 80% of whom predicted a 25-basis-point rate hike. They expressed confidence that the May increase would be the "final chord" of the current cycle. Of the 25 economists surveyed, 21 stated that the RBNZ would raise the OCR by 25 basis points, bringing it to 5.50%. The remaining four economists predicted maintaining the status quo. According to the median forecast, the rate will remain 5.50% until the end of 2023 after the May hike. However, almost 30% of the surveyed economists considered the possibility that the regulator could take a step back at the end of this year, lowering the OCR "by at least 25 basis points."
Conclusions
The upward trend of NZD/USD is fragile. Following the May meeting of the RBNZ, the New Zealand dollar may come under pressure, despite the almost guaranteed 25-basis-point rate hike.
First, implementing the 25-basis-point scenario is already priced in, and this fact will not trigger a northward impulse on the NZD/USD pair. On the other hand, the "conclusive" rhetoric of the RBNZ could provoke volatility, but not in favor of the New Zealand dollar. If the central bank hints at a pause in rate hikes (after the May increase), the NZD/USD pair could decline to at least 0.6200 (the lower line of the Bollinger Bands indicator on the four-hour chart). The key support level (the target for southward movement in the medium term) is at 0.6090, the lower line of the Bollinger Bands indicator on the D1 timeframe.
