Reserve Bank of New Zealand Preview: Growth fears could temper hawkish rhetoric

• The Reserve Bank of New Zealand is set to hike OCR by 50 bps to 3.0% in August.
• Hard-landing fears are becoming more prominent, RBNZ’s policy guidance holds the key.
• Kiwi bulls need more than a 50 bps rate hike to reverse the bearish momentum.

At its policy review meeting this Wednesday, the Reserve Bank of New Zealand (RBNZ) is expected to raise the key interest rate for the fourth straight meeting, as it remains committed to fighting stubbornly-high inflation. However, the rate hike could be seen as dovish, should persisting fears over a potential global recession temper the central bank’s hawkish rhetoric.

All eyes on RBNZ’s future policy path

The RBNZ is seen raising the Official Cash Rate (OCR) by 50 bps once again on August 17, lifting it from 2.5% to 3.0%.  The central bank’s rate rise will be its most aggressive tightening in over two decades. The policy announcement will be accompanied by the updated projections and followed by Governor Adrian Orr’s press conference.

Economists predict the central bank to deliver a half percentage point rate increase to 3.0% this Wednesday while expecting rates to reach 3.50% or higher by the end of 2022. Some of them forecast the central bank to revert to the usual 25 bps rate hikes at its October and November meetings.

In its July policy meeting minutes, the RBNZ noted that the “committee agreed to maintain its approach of briskly lifting the OCR.” Although it mentioned that “members agreed that the increase in mortgage interest rates will assist to bring house prices more in line with sustainable levels.”

New Zealand house prices fell in July with the median price recording its first annual fall since 2011, the Real Estate Institute of New Zealand (REINZ) said. The easing in the property prices is likely to offer the bank a reason to slow down its tightening cycle, as it battles economic growth risks.

New Zealand’s Gross Domestic Product (GDP) contracted 0.2% in the first quarter of this year amid COVID-19 flare-ups. Meanwhile, the global tightening spree to tame inflation has raised concerns over the health of the economy.

However, the country’s Consumer Price Index (CPI) accelerated from 6.9% YoY to 7.3% in Q2, the fastest pace in three decades, briefly propping up bets of a 75 bps lift-off. But they soon vapored out after an RBNZ survey showed that the country’s inflation expectations eased across the time curve in the third quarter of 2022.

The risks of a hard landing look more real now than before, which could dissuade the central bank from betting on a super-sized rate rise. In light of this, the RBNZ’s updated projections on the cash rate will be closely examined.

Trading NZD/USD with RBNZ decision

Wednesday’s RBNZ announcement could fail to offer any reprieve to NZD bulls if the bank delivers the expected 50 bps rate hike but underscores growth concerns and hints at a potential easing in its rate-hike track.  

In such a case, NZD/USD could extend the ongoing downtrend towards the 0.6250 psychological level. Although the prevalent risk tone combined with the US dollar price action will hold the key to the pair's reaction to the RBNZ decision.

The kiwi pair could stage a solid comeback towards the 0.6400-0.6450 supply zone should the central bank back aggressive tightening expectations, in its commitment to ward off inflation.