New Zealand Dollar: Growth check and scope for dovish repricing – BBH

Brown Brothers Harriman’s (BBH) Elias Haddad highlights that New Zealand Q2 Gross Domestic Product (GDP) is expected to slow sharply, with domestic demand weighed by higher fuel prices, uncertainty and falling house prices, though leading indicators suggest Q3 recovery. The Reserve Bank of New Zealand (RBNZ) projects a relatively low policy rate peak versus the swaps curve, leaving room for dovish repricing that could act as a drag on the New Zealand Dollar.

Weak growth and rate expectations

"New Zealand Q2 real GDP (Wednesday). Production-based real GDP is expected at 0.1% q/q (RBNZ projection: 0%) vs. 0.8% in Q1."

"Lower real incomes due to higher prices for fuel, elevated uncertainty, and declining house prices reduced domestic spending and growth over Q2. Encouragingly, leading indicators point to a recovery over Q3."

"The RBNZ cautioned that “spare capacity remains in the economy, particularly in the labour market.” In contrast, the swaps curve implies a policy rate at 4.25% in the next two years. This gap leaves ample room for a dovish repricing which is a drag on NZD."

"The RBNZ projects the policy rate (currently, 2.75%) to peak at around 3.25% in 2028, which would still leave it below the top end of its nominal neutral range estimate between 2.3% and 4.1%."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)