With markets focused on global yield, curves and risk environment RBNZ policy meeting will increase in relevance. There is growing faith in the reflation and central bank “normalization” story, which, counter to economic data has drifted to New Zealand. We suspect markets have getting way ahead of themselves with hawkish bets. The RBNZ meeting is the final before Adrian Orr undertakes the governorship in March. The RBNZ is expected to hold policy unchanged. As with other G10 countries domestic inflation has disappointed as economic improvement has not translated into price pressures. Jobless rate fell to a fresh nine-year low in the December quarter but an influx of workers has kept wage inflation from accelerating.
Inflation pressures have unexpectedly slowed annual inflation rate to 1.6% from the prior quarter's 1.9% as cheaper food as consumer discretionary all but offset higher cost fuel and housing. The RBNZ is priced to remain on hold this year and a dovish message will dampen speculation for earlier lift off. The net result will likely be a weaker NZD on dovish central bank messaging.
By Peter Rosenstreich