RBNZ to pause monetary policy tightening?

July 11, 2023 11:58

Will the Reserve Bank of New Zealand (RBNZ) refrain from raising interest rates on Wednesday, or will it follow the Reserve Bank of Australia’s example of tightening its policy even more? This is the question that has markets on their toes as the RBNZ’s board was one of the first to raise borrowing costs in order to tackle consumer price inflation.

In the UK, a report regarding average earnings showed that, despite warnings from the Bank of England (BoE) the government, wages continued to rise, hitting a record growth rate in the three months to May. Market analysts suggest that the BoE might have to hike interest rates once again to combat inflation.

The European Central Bank’s (ECB) policymaker Francois Villeroy de Galhau said that “we are starting to have good news on inflation,” forecasting that inflation would continue to decline and would be back at 2% by 2025.

RBNZ Interest Rate Decision

The Reserve Bank of New Zealand will announce its decision on interest rates on Wednesday morning. Most economists suggest that New Zealand’s central bank won’t hike interest rates. Economists polled by Reuters on July 7th, forecast that the RBNZ will likely keep interest rates unchanged at 5.50% after the July 12th meeting and for the rest of 2023, marking an end to its 20-month hiking cycle, which has already pushed the economy into recession.

Interest rates are at a 14-year high, while headline inflation came in at 6.7% in May on an annualised basis, still higher than the central bank’s 1-3% target. A Kiwibank report seems to agree with the Reuters’ poll forecasts noting that "in the May statement they gave us a crystal clear OCR track. Only a few commentators out there can't seem to figure it out, but it's just a flat straight line that goes well into next year. That will not have changed. That last move was a signal that they're pausing from now and part of that is the fact the economic data has come in below their own forecast ... there's nothing really else for them to say other than 'we're waiting, we're watching'.”

UK Average Earnings and Unemployment Rate

A report by the Office for National Statistics (ONS) showed that average earnings (excluding bonuses) in the U.K. rose by 7.3% in the three months to May, on an annualised basis. This is the fastest growth rate on record. However, the country’s unemployment rate rose to 4%, whilst economists had forecast that the figure would remain unchanged.

As workers seem to be still able to enjoy hefty pay rises, some analysts suggest that the Bank of England would be forced to keep tightening its monetary policy by raising borrowing costs. ING economists said that “a few months ago it looked like UK wage growth had peaked. Now it is running at its fastest pace yet, and, depending on next week’s inflation figures, it could push the Bank of England into another 50bp rate hike in August.”

China CPI Inflation Remains Steady in June

China’s consumer price index remained unchanged in June, on an annualised basis, after rising by 0.2% in May. Economists had forecast a 0.2% rise. Barclays economists quoted by Reuters said: “We think the more challenging deflation environment and sharp slowdown in growth momentum support our view that the PBOC has entered a rate-cutting cycle.”

Beijing has set a target for average consumer inflation in 2023 of about 3%. Prices rose 2% year-on-year in 2022. The National Bureau of Statistics (NBS) also revealed that the producer price index (PPI) fell for a ninth consecutive month in June, down 5.4% from a year earlier, the largest decline in the last 7 years.

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This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.

Miltos Skemperis
Miltos Skemperis Financial Content Writer

Miltos Skemperis’ background is in journalism and business management. He has worked as a reporter on various TV news channels and newspapers. Miltos has been working as a financial content writer for the last seven years.