• The Reserve Bank of New Zealand to keep steady at 0.25% in February.
  • The central bank to revise up its economic forecasts.
  • Hints towards a rate hike could spark a correction in NZD/USD.

New Zealand’s relative success in combating the coronavirus pandemic has propelled a swift economic recovery. Therefore, the Reserve Bank of New Zealand (RBNZ) could remain in a wait-and-see mode on Wednesday before it announces any adjustments to its monetary policy decision later this year.

RBNZ looking for changes to OCR forward guidance?

The RBNZ is seen maintaining the Official Cash Rate (OCR) at a record low of 0.25% for the sixth straight month in February. The kiwi central bank could play down tightening expectations for this year, although could turn out to be less-than-expected amid improving economic outlook, as reflected by the improvement in key macro indicators.

The unemployment rate unexpectedly fell to 4.9% in the fourth quarter and inflation expectations are seen rising while the RBNZ’s 2% price target now appears closer. The NZ retail sales, however, dropped by 2.7% QoQ in Q4, snapping the 28% growth seen in the previous quarter while surprising markets to the downside.

The Kiwi central bank could revise up its growth, employment and inflation forecast to paint an upbeat economic outlook, although closed borders overseas continue to threaten its tourism industry.

The RBNZ is unlikely to hint towards the withdrawal of the stimulus either, as the need for policy support persists, especially after the country’s biggest city Auckland emerged out of a lockdown a week ago. The fears over the spread of the new covid strain loom, which could keep the central bank on the defensive.

Instead, the RBNZ could call for extending its Large-Scale Asset Purchase (LSAP) program, which is currently maintained at NZ$100 billion. This could be in light of the extension to the quantitative easing (QE) programme announced by the Reserve Bank of Australia (RBA) announced this month.

The board members could decide to add forward guidance to the OCR, probably hinting towards a rate hike early next year.

The rate decision is due this Wednesday at 0100 GMT followed by Governor Adrian Orr’s Orr will hold a press conference at 0200 GMT.

Less dovish RBNZ could knock-off the Kiwi

Optimism on the economic outlook could prompt the RBNZ to stand pat on the interest rates but any signals towards a potential rate hike next year could be seen as a move towards a less dovish/ hawkish stance.

Subsequently, the kiwi dollar’s rally against the US dollar could be put at risk. NZD/USD could see a sharp corrective decline towards 0.7250 on a hawkish shift. Meanwhile, the kiwi could maintain its uptrend near 34-month highs above 0.7300 if Orr and Co. endorse a wait-and-see approach for the foreseeable future, allowing the fiscal policy to stimulate the economic recovery.

The broader market sentiment and the RBNZ’s take on the negative rates could also have a significant impact on the kiwi pair. Heading into the RBNZ decision, NZD/USD rides higher on the global reflation wave, amid rising inflation expectations, which has fuelled a new commodity supercycle.

More: NZD/USD: What’s in store for the kiwi?

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