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Market Analyst
Reserve Bank of New Zealand (RBNZ) rate hike pricing has jumped as tradable inflation swings from -1.6% to 4.9% annually. Swaps markets now price a far steeper official cash rate path than the Reserve Bank of New Zealand set out in its September projections, with around 40 basis points of additional tightening priced by the December meeting. Higher energy costs and a weaker New Zealand dollar are behind the shift, and both hit hard in a country that relies on imported fuel. With the economic recovery still in its infancy, the gap between market pricing and the central bank's own path is the key tension heading into the September quarter inflation report.
David Scutt, StoneX Media Senior Market Analyst, spent more than a decade as an FX spot, forwards and money markets dealer in bank treasury, managing interest rate and liquidity risk. He now produces technical and fundamental analysis across FX, commodities and equity indices, tracking how shifts in rate expectations flow through to currency pairs such as NZD/USD and AUD/NZD.
Swaps markets are pricing a far more hawkish Reserve Bank of New Zealand path than the central bank's own projections, driven by imported inflation pressure. Scutt explains that "Swaps traders have responded to the ugly combination by pricing a far more hawkish path of the NZ cash rate", pointing to elevated energy prices meeting a weaker New Zealand dollar. The New Zealand trade-weighted index has fallen around 3.7%, raising the local currency cost of imports just as fuel costs climb. "That's a problem for a country reliant on imported refined petroleum products", he adds. For RBNZ rate hike pricing, the upshot is a market betting that persistent imported inflation will push the central bank toward a much tighter stance than it has signaled.
"After a prolonged period in which falling tradable prices helped to offset persistent domestic inflation, that disinflationary force has disappeared", according to Scutt. New Zealand tradable inflation, which stems from overseas factors, has swung from -1.6% to 4.9% annually, and its six-month annualized pace has accelerated to around 6.9%. Non-tradable inflation has moderated to 3.4%, yet that remains above acceptable levels, so the domestic side offers the Reserve Bank of New Zealand little relief. Energy is doing most of the damage, with diesel up 55.8% over the year, petrol up 24.3%, gas up 11.4% and electricity up 9.5%. The risk is that "the longer the wars in Iran and Ukraine persist", the greater the chance elevated energy costs spill into other categories and inflation expectations.
--- Written by Frédéric Guétin, StoneX Media Producer
--- Expert: David Scutt, StoneX Media Senior Market Analyst
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Swaps markets are pricing a far steeper Reserve Bank of New Zealand rate path than the central bank itself projected. Imported energy inflation and a weaker New Zealand dollar sit behind the gap, putting the September quarter inflation report under pressure.
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