AUD/NZD edges lower as NZ CPI pushes rate cut prospects further away

Key points

The New Zealand Dollar was holding gains against its Australian counterpart on Wednesday, after the latest New Zealand CPI inflation report pushed investor expectations of a first rate cut by the Reserve Bank of New Zealand further away.

New Zealand’s annual headline inflation decelerated to 6% in the second quarter, or at a slower rate than expected, from 6.7% in Q1. It has been the lowest inflation reading since Q4 2021, but prices continued to increase at rates unseen since the 1990s.

According to Statistics New Zealand, food, housing and household utility prices were the biggest contributors to inflation.

In quarterly terms, the Consumer Price Index rose 1.1% in Q2, following a 1.2% gain in the first quarter. The median analyst estimate had pointed to a 1.0% quarterly increase.

Despite the cooling, inflation still remained above the RBNZ target range of 1%-3%.

The Reserve Bank of New Zealand left the official cash rate without change at 5.5% at its July meeting, after delivering a total of 525 basis points of rate hikes since October 2021.

Though the RBNZ has said it now believes policy tightening is having the desired effect on inflation, the central bank expects interest rates to remain at a “restrictive level” for the foreseeable future.

“Data reinforce that the RBNZ can not yet pat itself on the back for a job well done,” ASB senior economist Kim Mundy commented.

“Moreover, the RBNZ will most likely be concerned to see that price rises became more widespread in Q2.”

Meanwhile, Aussie traders now look to Thursday’s employment data, with market consensus pointing to growth of 15,000 in June. Australia’s rate of unemployment is expected to remain steady at 3.6%.

Higher-than-expected jobs growth may reinforce the case for the Reserve Bank of Australia to resume policy tightening in August, while underpinning the Australian Dollar.

“The labour market has remained inordinately resilient despite the slowing economy, which could sustain upward pressure on wages,” Abhijit Surya, an economist at Capital Economics, was quoted as saying by Reuters.

“We’re sticking with our view that the RBA will hand down two more 25bp rate hikes by September before concluding its tightening cycle.”

As of 10:31 GMT on Wednesday AUD/NZD was edging down 0.11% to trade at 1.0839. The Forex pair retreated to as low as 1.0791 immediately after the NZ CPI data release.