New Zealand dollar sell-off sparked by RBNZ’s dovish stance

The Reserve Bank of New Zealand (RBNZ) kept the Official Cash Rate (OCR) unchanged at 5.50% for the eighth consecutive meeting, in line with market and economist broad expectations. However, in today’s meeting, the central bank surprisingly switched to a more dovish stance, suggesting that a rate cut may be closer than previously expected.

As you may recall, the RBNZ meeting in May surprised the market and sounded hawkish. This drove the New Zealand dollar up strongly. It was expected that the RBNZ would lower its forecasts, especially for inflation and the OCR, but the opposite happened: both inflation and OCR forecasts were raised. Moreover, at the previous meeting, RBNZ Governor Adrian Orr also stressed this point in his press conference, that policymakers “genuinely considered” the possibility of raising the OCR.

Nonetheless, while the summary minutes of today’s meeting note that “the Committee agreed that monetary policy needs to remain restrictive”, the addition of the sentence “the extent of this restriction will moderate over time in line with expected lower inflation pressures” is a key point and represents a departure from the hawkish tone of May.

The statement “restrictive monetary policy has significantly reduced consumer price inflation” is more dovish in today’s press release, while the statement “restrictive monetary policy has reduced capacity pressures in the New Zealand economy and reduced consumer price inflation” in the May press release was more dovish. The summary minutes also largely repeat that headline inflation is expected to reach the RBNZ’s inflation target range of 1.0% to 3.0% in the second half of this year.

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