RBNZ Expected to Hold Rate Steady as Markets Look for Signs of Future Hikes

The consensus among economists surveyed in New Zealand media points to an unchanged rate. Despite headline inflation easing significantly from its mid-2022 peak of 7.3% to 4.7% in the December 2024 quarter, domestic inflationary pressures, particularly within the services and construction sectors, are proving persistently high at around 5.5%. Core inflation metrics, which exclude volatile elements like fuel and fresh food, have also demonstrated a slow retreat.

The RBNZ's preferred measure, the sectoral factor model, registered 4.8% in its latest reading, still considerably above the central bank's comfortable 1-3% target range. This situation presents the RBNZ with a challenging balancing act: acknowledging the downward trend in overall inflation while addressing the entrenched domestic price pressures. The New Zealand labour market remains robust, with unemployment hovering near historical lows at 3.9% in the December quarter. Wage growth, albeit moderating, is still elevated at 4.3% year-on-year, contributing to ongoing cost pressures for businesses.

Why it matters for Australian investors

While the RBNZ's decision directly impacts New Zealand, its implications often ripple across the Tasman, affecting Australian investors given the close economic ties between the two nations. A stable or even hawkish stance from the RBNZ could influence perceptions of global central bank resolve in tackling inflation, potentially informing the Reserve Bank of Australia's (RBA) future decisions. Investors monitoring the RBA's trajectory will scrutinise the RBNZ's forward guidance for clues on broader APAC monetary policy trends.

For Australian investors holding New Zealand dollar (NZD) denominated assets, or those with exposure to trans-Tasman businesses, the RBNZ's rhetoric on its OCR track and growth outlook is critical. A hawkish hold, implying elevated rates for longer, could strengthen the NZD against the Australian dollar (AUD) or other major currencies. Conversely, any signalling of future rate cuts could lead to NZD depreciation, impacting the value of international investments. Australian crypto investors, in particular, often view stable fiat currencies as safe havens or trading pairs, and shifts in the NZD's strength can indirectly affect trading strategies, especially for those using AUD/NZD pairings or stablecoin conversions.

Furthermore, the RBNZ's challenges with sticky domestic inflation and a tight labour market mirror ongoing concerns within Australia. Insights from New Zealand's economic landscape can serve as a canary in the coalmine for similar economic forces at play domestically. Australian investors should remember that the ATO's tax treatment of crypto assets, such as Capital Gains Tax, remains consistent regardless of overseas central bank decisions, though market volatility stemming from such decisions can impact the taxable value of their holdings.

Impact on the AUD market

The RBNZ's decision, while specific to New Zealand, can have a noticeable, albeit indirect, impact on the Australian dollar (AUD) market. A more hawkish tone from the RBNZ, suggesting rates will remain higher for longer or even see another hike if domestic pressures persist, could lead to a strengthening of the NZD. Given the strong trading relationship and capital flows between Australia and New Zealand, a stronger NZD often translates to some pressure on the AUD, as investors may re-evaluate currency weightings.

Australian cryptocurrency exchanges like CoinSpot, Independent Reserve, Swyftx, and BTC Markets facilitate AUD-denominated trading. While they don't directly handle NZD, shifts in the AUD/NZD cross rate can influence sentiment and capital allocation. For instance, if the RBNZ's hawkishness makes the NZD more attractive, it could subtly divert some investment attention or capital flows that might otherwise have entered the Australian market or AUD-pegged crypto assets. However, the overall impact on the AUD market from a single RBNZ decision is typically more pronounced in forex markets than in the broader Australian crypto landscape, which often responds more directly to global macro trends and local regulatory developments from bodies like ASIC and AUSTRAC.

Conversely, if the RBNZ were to signal a willingness to ease policy sooner than expected, it could weaken the NZD, potentially providing a marginal lift to the AUD. However, this is not currently anticipated. The overriding message from the RBNZ will likely be one of sustained patience, maintaining a tightening bias without alarming markets. This general theme of central banks holding steady while inflation remains above target provides a backdrop of relatively higher interest rates, which can sometimes compete with riskier assets like cryptocurrencies for investor capital, even within the AUD ecosystem.

What to watch next

Investors will be sifting through the RBNZ's updated economic projections and accompanying statement for any material changes in its forward guidance. Key indicators to monitor include inflation forecasts, particularly whether the bank revises its near-term outlook upward for non-tradeable goods and services. Any alteration to the projected path of the OCR, which currently implies rates staying at or near present levels through early 2026, would be a significant signal.

The RBNZ's assessment of the growth outlook is also crucial. Markets will be keen to understand how the central bank views the risks of a sharper-than-expected economic slowdown, especially given recent data on weakening consumer spending and a softening housing market in New Zealand. Commentaries on global risks, such as geopolitical tensions in the Middle East and China's economic deceleration, will also offer insight into potential external pressures on New Zealand's export-dependent economy.

Currently, market pricing suggests a roughly 70% probability that the RBNZ's next move will be a rate cut, though not until late 2025. However, a 'hawkish hold' – where the RBNZ signals a higher bar for future easing – could push these expectations further out, prolonging the period of elevated borrowing costs. Wednesday's decision is unlikely to deliver an immediate rate change, but the nuances of the RBNZ's communication will be paramount for discerning the future direction of the New Zealand dollar, bond yields, and mortgage rates, with flow-on effects for Australian financial markets and investor sentiment.