NZD is due to benefit from an attractive carry for longer thanks to a more problematic disinflation path – ING

The Reserve Bank of New Zealand (RBNZ) changed its tone only moderately, keeping the threat of another hike on. However, the New Zealand Dollar (NZD) fell. Economists at ING analyze Kiwi’s outlook.

New Zealand’s inflation issues point to extended hawkish outlook

The RBNZ kept rates unchanged and did not tweak the projected rate path substantially. The new forecasts include a very marginally revised peak in the OCR at 5.60% as opposed to 5.69% in the November forecast, which lowers the implied probability of a hike to around 40%. The statement from the central bank, however, showed a clearer softening in the threat of more tightening.

The inflation forecast was revised lower to align it with recent figures, but it is unchanged when it comes to the medium term. Headline CPI is still seen at 2.5% in 4Q24, and non-tradeable CPI projections were also unchanged at 3.4% for the end of this year.

Some unwinding of recently growing net-long positions on NZD and the fact that some investors were still expecting a rate hike this week triggered a substantial fall in the NZD/USD pair. Our view in the medium term for New Zealand and NZD is – however – unchanged. NZD is due to benefit from an attractive carry for longer thanks to a more problematic disinflation path.