The Reserve Bank of New Zealand (RBNZ) will announce the results of its next policy meeting on May 28. According to most analysts, the central bank is expected to cut the interest rate by 25 basis points, marking the sixth rate cut since August last year.
A 25-basis-point cut is the baseline scenario and, therefore, the most anticipated. As such, the formal outcome of the May meeting is likely already priced into the market and will likely be ignored—unless the RBNZ unexpectedly cuts by 50 basis points, which is highly unlikely. Traders will instead focus on the key messages in the accompanying statement, the rhetoric of Acting Governor Christian Hawkesby (appointed after Adrian Orr resigned in March), and the updated forecasts.
Overall, the current fundamental backdrop supports further monetary easing, primarily due to a weak labor market and inflation remaining within the target range.
In the first quarter, New Zealand's unemployment rate stood at 5.1%, the same level as in the fourth quarter of 2024. This figure was better than analysts' expectations, who forecasted an increase to 5.3%. However, the unemployment rate is at multi-year highs, nearly reaching a five-year peak, indicating concerning trends in the labor market.
Additionally, the employment growth rate decreased by 0.7% year-on-year, which was worse than the expected decline of 0.5%. In quarterly terms, there was a slight increase of 0.1%. The wage growth index also fell short of expectations, rising to 2.5% when a rise of 2.7% was anticipated. This index has been consistently declining for the past eight quarters. Furthermore, the labor force participation rate in New Zealand dropped to 70.8%, lower than the forecast of 71.0%, down from 70.9% in the fourth quarter of last year.
Regarding inflation, the current situation is as follows: At the end of the first quarter, inflation accelerated slightly but remained within the target range set by the RBNZ, which is between 1% and 3%. In annualized terms, the Consumer Price Index (CPI) rose by 2.5%, following an increase to 2.2% year-over-year, with a forecast of 2.3%. In quarterly terms, the CPI increased by 0.9%, compared to a growth of 0.5% in the previous quarter.
As mentioned earlier, even though the economic indicators have accelerated, inflation remains within the central bank's target range. Additionally, last month, following the release of the Consumer Price Index (CPI), the RBNZ published its inflation indicator based on an industry factor model. This report showed that inflation in the first quarter decreased to 2.9%, down from the previous rate of 3.1%. The members of the RBNZ are closely monitoring the trends of this indicator, so the fact that it has returned to the target range will further support the case for reducing interest rates.
It's important to highlight that the data released last week showed that the volume of retail trade in New Zealand increased by 0.8% in the first quarter, following a previous rise of 1.0%. While this represents a decline in growth, the report can still be considered positive, as most experts had anticipated no growth for this indicator.
In other words, the current scenario suggests that a rate cut is likely at the May meeting. The key question is the tone of the RBNZ rhetoric—how dovish will it be? Currently, market expectations indicate that the RBNZ is expected to implement two more rate cuts before the end of the year. However, many analysts, particularly from ING, believe these expectations may be too dovish, given the actual acceleration of the CPI in the first quarter. Economists at Commerzbank share a similar viewpoint, suggesting that after the May meeting, the RBNZ's rate will reach a level that prompts the central bank to act more cautiously and, consequently, to issue more measured comments regarding future monetary policy easing.
Given that the cut is priced in, a neutral or slightly hawkish tone may support the New Zealand dollar.
Thus, it is advisable to open long positions using the downward rollbacks of NZD/USD. After all, there are other arguments that favor Kiwi buyers: in particular, these are discussions around the tax relief bill, which will increase the debt burden in the United States, and the notorious "negotiation track," which also puts pressure on the American currency.
Thus, if the RBNZ does not assist NZD/USD buyers "in the moment," it may provide an opportunity to enter long positions at better prices.
Regarding "technique," the NZD/USD pair is still trading between the middle and upper lines of the Bollinger Bands indicator on the D1 timeframe, and it is still located above all lines of the Ichimoku indicator. The nearest resistance level (the northward movement target) is 0.6000 (upper Bollinger Bands line on the daily chart). The main target is 0.6070 (upper boundary of the Kumo cloud on the W1).
