MUFG's Assessment: Persistent Inflation Keeps RBNZ on Alert
MUFG analysts point out that ongoing price pressures in New Zealand's economy, particularly in non-trade sectors like housing and services, are a significant reason for the heightened risk of rate hikes. Although overall inflation has retreated from its peak in 2022, core indicators remain above the RBNZ's target range of 1-3%. The central bank hinted in its February monetary policy statement that it would maintain elevated interest rates, and MUFG believes subsequent data has not alleviated these concerns.
“The risk of a rate hike in July is very real and should not be underestimated,” the MUFG report states. “The RBNZ has maintained a relatively hawkish stance among developed country central banks, and given that inflation remains above target, further action cannot be ruled out.”
Market Impact and New Zealand Dollar Outlook
The prospect of a July rate hike has a direct impact on the New Zealand dollar (NZD), which has shown sensitivity to RBNZ communications. A rate hike could provide short-term support for the currency, widening the interest rate differential with the US dollar and other major currencies. However, MUFG warns that if the global economic outlook remains weak, the impact may be short-lived.
“A July rate hike would be a hawkish surprise, but the rebound of the New Zealand dollar may be limited by external headwinds, including slowing economic growth in China and global trade uncertainties,” the analysis adds.
Impact on Borrowers and the Economy
For households and businesses in New Zealand, further rate hikes would add to the economic pressure already experienced from 525 basis points of tightening since October 2021. Mortgage holders would face higher repayments, while businesses would have to contend with elevated borrowing costs, potentially dampening investment. The RBNZ must weigh the necessity of controlling inflation against these risks.
The central bank's next decision is scheduled for July 10, 2025. According to overnight index swap data, the market currently estimates a roughly 40% probability of a 25 basis point rate hike, but this probability could change rapidly with upcoming employment, GDP, and inflation expectation data.
MUFG's analysis emphasizes that the RBNZ's battle with inflation is far from over, and the risk of a July rate hike remains a key theme in currency and fixed income markets. Investors and policymakers will closely monitor the next round of economic data for clues on whether the central bank will continue to raise rates or hold steady. This decision will have significant implications for the New Zealand economy.