New Zealand's business inflation expectations remained largely unchanged in the first quarter, setting the stage for the Reserve Bank of New Zealand's (RBNZ) meeting on February 19. Market watchers anticipate a rate cut, with the probability split evenly between a quarter-point and a half-point reduction. Since the RBNZ began its easing cycle last August, it has reduced rates by a total of 125 basis points. The New Zealand Dollar (NZD), which has depreciated approximately 11% since October 1, finds itself at 0.5639 against the US dollar (USD) in the European session, reflecting a slight dip of 0.04%.
The unchanged inflation rate of 2.2% year-on-year in the fourth quarter remains close to the RBNZ's target. Meanwhile, two-year inflation expectations have slightly declined to 2.06% from 2.12% in the previous quarter. These figures provide context for the RBNZ's upcoming decision, as a weak NZD bolsters the argument for a modest rate cut next week.
The NZD's ongoing depreciation is a critical factor influencing the RBNZ's decision-making process. If the RBNZ opts for a half-point rate cut, it could significantly expand the interest rate differential between New Zealand and the United States, given that the Federal Reserve Chair Jerome Powell has indicated no immediate plans to lower US rates.
The current cash rate in New Zealand stands at 4.25%, and a reduction would further align with global monetary policy trends aimed at stimulating economic growth amid uncertain inflation dynamics. Gold prices have surged again, resuming their rally near $2,920, indicative of broader market sentiments and potential hedging against currency fluctuations.
In addition to domestic factors, international influences such as the US Consumer Price Index (CPI) data for January, released on Wednesday, and EUR/USD trading dynamics also play a role in shaping the market environment. The EUR/USD remains well-supported above 1.0400 in Thursday's European session, highlighting the ongoing strength of the Euro relative to other major currencies.