COMMENT-RBNZ likely to hold rates, but expect volatility

The Reserve Bank of New Zealand is widely forecast to hold its cash rate at 5.50% on Wednesday according to a Reuters poll, but a split between economists and market pricing suggests scope for volatility, especially given the RBNZ's propensity to surprise.

A vast majority of analysts expects no more rate hikes, with a possible first cut in August, following an unexpected contraction in New Zealand's third-quarter GDP, a startling dive in retail sales volumes in Q4 and a fall in Q1 2024 inflation expectations among business leaders and professional forecasters.

In contrast, New Zealand's declining but still sticky inflation, tight jobs market, a sharp jump in five-year household inflation expectations to 3% from 2% and hawkish comments from RBNZ officials have prompted markets to price a roughly 30% chance of a hike on Wednesday, and a 60% chance of one by May.

The RBNZ is likely to balance these factors with a 'hawkish hold', leaving the projected peak OCR at 5.69% while retaining an option of further tightening if inflationary pressures do not dissipate fast enough to attain its 2% target.

A surprise rate hike would result in NZD/USD testing resistance at 0.6244 and 0.6292, the 61.8% and 76.4% Fibonacci retracements of its December-February decline. A dovish surprise in the form of a slightly lower OCR track would open a test of 0.6108 and 0.6082-90.

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