The New Zealand Institute of Economic Research’s shadow board recommends that the Reserve Bank of New Zealand keep the Official Cash Rate at 3.25% during the policy review in July. The RBNZ will meet on July 9. Analysts note the slow economy, mixed inflation risks, and global uncertainties as reasons to pause any rate cuts for now. Looking ahead, board members generally expect the OCR to stay between 2.75% and 3.25% over the next year. The uncertain inflation outlook suggests that the cycle of rate cuts may be coming to an end. While there’s limited room for further cuts, a few members believe that additional reductions could help boost economic recovery.

The Shadow Board’s Independence

The Shadow Board works independently from the RBNZ. They offer recommendations for the RBNZ’s actions rather than making predictions about actual outcomes. From their latest recommendation, it seems the Shadow Board thinks current monetary policies are adequate for now. They believe these policies can keep inflation in check without severely hindering sluggish economic growth. Their suggestion to maintain the Official Cash Rate at 3.25% comes not from optimism but from concerns about global instability and a domestic economy that lacks clear direction. While inflation is less of a concern now, it hasn’t decreased enough for policymakers to confidently lower rates. Recent consumer price data still show enough risk, especially with persistent price pressures in services. This suggests medium-term expectations for rates shouldn’t count on quick or aggressive cuts. The lower range of the board’s one-year outlook, at 2.75%, indicates only a cautious possibility for change—not an opportunity for looser settings. However, some board members argue that more monetary easing might be needed because weak domestic demand could impact the economy into 2025 without intervention. Still, those advocating for stability seem to outweigh these voices.

Strategic Implications for Monetary Policy

From a strategic standpoint, there is now less reason to expect early cuts or rapid decreases in the OCR. At this point, collecting data is critical. We need to closely monitor labor market trends, real wage pressures, and spending habits. If any show new weaknesses without offsetting strengths, we may need to adjust our approach quickly. Overall, the central bank’s current cautious attitude means outcomes are not set in stone. Future decisions are likely to rely on data rather than sentiment. What stands out is the board’s willingness to be flexible, though they are cautious. As we analyze these findings, we believe implied volatility may increase as the next RBNZ meetings approach, especially if external pressures—such as bond yields or commodity-linked currencies—change expectations. Currently, liquidity is sufficient, but if market views shift significantly, short-term rate hedging or tactical positioning may need to be reassessed. The diverse views among the board provide a clear framework for assessing risks. Holding steady at 3.25% is now the baseline. Any moves outside this range will likely require strong justification from significant changes in inflation data or widespread economic concerns. Over the next two quarters, it’s crucial to pay attention to which of these factors prevails. Create your live VT Markets account and start trading now.

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