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Inflation concerns prompt expected RBNZ rate increase

Published 24/05/2023, 11:08 am
Updated 24/05/2023, 11:08 am
© Reuters.

© Reuters.

Investing.com - The Reserve Bank of New Zealand (RBNZ) is anticipated to announce a modest 25-basis point increase in interest rates on Wednesday, marking the smallest hike since February 2022 when rates were raised from 0.75% to 1.00%. The current benchmark cash rate stands at 5.25%.

Although the RBNZ would prefer easing its aggressive tightening approach, inflation remains persistent and well above target levels, keeping it as the central bank's top priority. While inflation decreased slightly in March from 7.2% to 6.7%, it continues to be more than double the desired range of between one and three percent.

There was a glimmer of optimism earlier this month when first-quarter inflation expectations dropped from their previous quarter level of 3.30% down to a more manageable figure of around 2.8%. This decline may have solidified Wednesday's expected rate hike as the central bank closely monitors any changes that could lead toward even higher levels.

New Zealand's high-interest-rate environment has had an impact on cooling its economy, with retail sales figures revealing a decline of 1.4% for Q1.

Analysts at TD Securities believe that there is potential for the RBNZ to raise interest rates by 50 basis points this week and increase their estimate of the terminal rate from 5.50% to 6%. They argue that factors such as budget stimulus, higher net migration, and elevated twin deficits contribute to an increased risk of inflation remaining above target levels beyond the next year. These concerns may push the central bank towards taking more assertive action in managing New Zealand's economic situation.

In addition to monitoring developments surrounding RBNZ decisions, investors will also pay close attention to upcoming U.K. inflation data and U.S. Federal Reserve FOMC minutes scheduled for release later in the session.

 

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