Orr Speech: RBNZ Governor speaks on policy outlook after holding interest rate

Reserve Bank of New Zealand’s (RBNZ) Governor Adrian Orr is addressing the press conference following the February monetary policy announcement, responding to media questions.

At its February policy meeting, the RBNZ decided to keep the policy rate steady at 5.50% for the fifth meeting in a row.

RBNZ press conference key quotes

We did discuss a hike in rates.

Strong consensus that rates were sufficient.

Still concerned about underlying inflation, how grown inflation is easing.

Domestic price pressures are easing as expected.

Hardest variable for us to manage is low productivity.

Central banks may have to hold rates higher than markets expect.

Should be seeing banks competing on mortgage rates.

We have an asymetric reaction function toward inflation risk.

Data has given us more confidence over outlook than in November.

We are in a disinflation period.

Economy faces soft landing scenario.

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This section below was published at 01:00 GMT following the Reserve Bank of New Zealand (RBNZ) policy announcements.

The Reserve Bank of New Zealand (RBNZ) board members decided to hold the Official Cash Rate (OCR) unchanged at 5.5%, as widely expected in its February monetary policy meeting.

Minutes of the RBNZ interest rate meeting

“Ongoing restrictive monetary policy settings are necessary to guard against the risk of a rise in inflation expectations.”

“Capacity pressures have eased significantly over the past year.”

“The committee agreed that interest rates need to remain at a restrictive level for a sustained period of time.”

“The committee noted that aggregate demand is now better matched with the supply capacity of the economy.”

“The starting point for capacity pressures in the New Zealand economy is only slightly lower than previously assumed.”

“The committee is conscious that the economy has limited capacity to absorb further upside inflation surprises.”

“Recent drops in core inflation and business inflation expectations are encouraging, but they remain above the 2 percent mid-point of the committee’s target band.”

RBNZ forecasts

"Sees official cash rate at 5.59% in June 2024 (prior 5.67%)."

"Sees official cash rate at 5.47% in March 2025 ( prior 5.56%)."

"Sees TWI NZD at around 71.5% in March 2025 ( prior 70.7%)."

"Sees annual CPI 2.6% by march 2025 ( prior 2.4%)."

"Sees official cash rate at 5.33% in June 2025 ( prior 5.42%)."

"Sees official cash rate at 3.16% in March 2027."

NZD/USD reaction to the RBNZ interest rate decision

The New Zealand Dollar comes under selling pressure in an immediate reaction to the RBNZ ’s status quo. The NZD/USD pair currently trades around 0.6124, down 0.70% on the day. 

NZD/USD: 15-minutes chart

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This section below was published on Tuesday at 20:15 GMT as a preview of the RBNZ Interest Rate Decision

• The Reserve Bank of New Zealand is likely to maintain the interest rate at 5.50% in February.
• RBNZ Governor Orr’s press conference and updated macro forecasts will grab the market’s attention.
• The New Zealand Dollar gears up for a volatility spike on RBNZ Governor Orr’s words.

The Reserve Bank of New Zealand (RBNZ) will convene its first monetary meeting of 2024 on Wednesday. The RBNZ board members are expected to keep the Official Cash Rate (OCR) steady at 5.50% for the fifth meeting in a row. However, some economists are foreseeing the February meeting to be a “live” one, with upside risks for a rate hike.

The New Zealand Dollar (NZD) is set to witness intense volatility on a surprise rate hike or a hawkish hold by the RBNZ.

What to expect from the RBNZ interest rate decision?

The Reserve Bank of New Zealand will publish its first Monetary Policy Statement (MPS) of this year, including the updated economic forecasts, alongside the interest rate announcement on Wednesday at 01:00 GMT. RBNZ Governor Adrian Orr’s press conference will follow at 02:00 GMT.

Data published by Stats NZ showed that New Zealand’s annual Consumer Price Index (CPI) increased by 4.7% for the December quarter, the smallest annual rise in more than two years. However, the figure was still above the RBNZ's target of 1.0%-3.0%.

Despite the CPI data indicating disinflationary conditions in New Zealand’s economy, the Australian and New Zealand Banking Group (ANZ) revised their rate call earlier this month, noting that “we now expect the RBNZ to hike the OCR 25 basis points (bps) in February and April, taking it to 6.0%.”

“We just don’t think the RBNZ will feel confident they’ve done enough to meet their inflation mandate,” the ANZ said.

However, the country’s falling inflation expectations nudged markets to reprice their expectations for the RBNZ interest rate outlook. Two-year inflation expectations, seen as the timeframe when RBNZ policy action will filter through to prices, fell to 2.5% from 2.76% in the December quarter, the central bank’s quarterly survey showed.

Further, Stats NZ's Selected Prices Indexes (SPI) showed that the annual increase in inflation actually fell to 6.8% in January from 7.0% in December.

At its November policy meeting, the RBNZ said that “if inflationary pressures were to be stronger than anticipated, the OCR would likely need to increase further,” adding that “the Monetary Policy Committee agreed that interest rates will need to remain at a restrictive level for a sustained period of time.” The central bank projected a peak OCR of 5.69% in the September quarter of 2024, leaving the door ajar for one more rate hike this year.

Previewing the RBNZ policy announcement, analysts at BBH noted: “Reserve Bank of New Zealand meets Wednesday and is expected to keep rates steady at 5.50%. It will release its Monetary Policy Statement with updated macro forecasts at the same time. Markets see around 25% odds of a 25 bp hike this week and the focus will be on the updated rate path projections.”

“We doubt the revised RBNZ projections will rule out an additional policy rate increase because of stronger than expected non-tradable inflation and private sector wage growth in Q4. As such, NZD risks are skewed to the upside,” the analysts added.

How will the RBNZ interest decision impact the New Zealand Dollar?

Should the RBNZ surprise markets with a 25 bps rate hike or raise the forecast for the peak rate to 6.0%, the New Zealand Dollar is likely to meet a fresh buying wave against the US Dollar. In case of any hawkish surprises, the NZD/USD pair could stage a solid rebound toward the 0.6250 level.

On the other hand, if RBNZ Governor Orr’s comments are balanced, suggesting a “higher for longer” interest rate view, the NZD/USD correction is expected to gain traction, knocking the pair down toward the 0.6100 barrier. Additionally, a dovish pause by the central bank could also spell doom for the Kiwi.

Dhwani Mehta, FXStreet’s Senior Analyst, offers a brief technical outlook for trading the New Zealand Dollar on the RBNZ policy announcements: “The NZD/USD pair is battling the critical 50-day Simple Moving Average (SMA) at 0.6180 on its corrective downside. The 14-day Relative Strength Index (RSI) indicator, however, is still holding above the midline, suggesting that risks remain skewed to the upside for the pair.”

“The immediate upside hurdle is seen at the 0.6220 round level, above which the July 27 high of 0.6274 will come into play. NZD buyers will then aim for the 0.6300 figure. Conversely, a sustained move below the 50-day SMA at 0.6180 could open doors for a test of the 0.6100 mark. Further south, the 200-day SMA at 0.6075 could come to the rescue of NZD/USD,” Dhwani adds.