The dominant theme this week is what will happen to interest rates? All eyes will be on the Reserve Bank’s meeting on Wednesday afternoon. There are a range of views out there. We hold to our view that holding the cash rate is the right decision. And we expect the RBNZ to make this decision. A rapid decrease in oil prices and stabilising situation in the Middle East lowers the medium-term inflation risk, supporting a hold in July.

In their May decision, the Monetary Policy Committee were divided into two camps. The external members voted for a 25-basis point rate hike. The internal members voted to hold, preferring to wait and see how the oil crisis flowed through to Kiwi economic data. And the decision enabled policymakers to see the sharp decline in oil prices. Waiting for more information is usually a good decision. Hopefully they will vote once again, to pause and assess.

The return of Dubai crude to sub $70 US/barrel should convince the committee that the inflation spike will be temporary, and not leak into medium outcomes. The latest consumer confidence data supports this. It showed 2-year ahead inflation expectations easing by 0.7 percentage points back to levels observed in January.

Markets disagree with our dovish sentiment. The implied probability of a hike has remained around two thirds. Wholesale markets are currently pricing in 17bps of a possible 25bps (~68%).

While we may not all agree on what the Wednesday’s decision should be, we do all agree that the next move is UP from here. The disagreement lies in the timing. Hawkish commentators favour an immediate start to the hiking cycle. Dovish commentators prefer a deferred start to allow the economy time to heal.

While the December 2025 and March 2026 data painted a rosier picture of the economy than many were expecting, the Kiwi economy was lukewarm at best. And we’re certainly not boiling. The demand destruction caused by the oil crisis in the second quarter only amplified that tepidness. Consumer confidence may have increased in June, but it still remains negative and well below historical averages. House prices continued to slide in June, with a 0.2% decline for all of New Zealand and a 4.3% decline in Auckland (Barfoot & Thompson). This will leave Kiwi homeowners feeling less wealthy and therefore less eager to spend.

Considering all of this, we believe the Reserve Bank will make the right choice and hold the OCR on Wednesday.

Internationally, we had the US labour market report. June payrolls increased, but were well below expectations, while unemployment edged down to 4.2%, largely because labour force participation fell. Overall, the report implies that US economic momentum is cooling. US equity markets continued to perform well over the past week despite this. Markets interpreted the data as reducing the need for Fed tightening, although inflation concerns remain.

Financial Markets

The comments below were provided by Kiwibank traders. Trader comments may not reflect the view of the research team.

In Markets - RBNZ week, and the answer is…

The past week saw the local rates track edge higher with domestic data flow contributing to a reassessment in the priced rate path. The swap curve underwent a mild steeping ahead of the upcoming RBNZ policy review. Offshore commentary was seen as providing some caution over the inflation outlook and risks of persistence and emergence of second-round effects, with the release of the RBA minutes from the June meeting and some Fed-speak.

Domestically we saw the business and consumer confidence surveys for June. Business confidence showed a lift in both overall confidence and own activity with increases across many sub-categories. Year-ahead inflation expectations declined to 3.4% from 3.6%. It was also noted that there was a small nudge higher in wage expectations along with the continued increase of ‘non-wage cost inflation’ concerns for firms. The consumer confidence survey released on Friday followed a similar theme with a lift in the headline confidence level and a decline in inflationary expectations. Though this still was seen higher than the band at 4.6%. The stronger prints did add a degree of additional momentum to the reassessment of near-term implied pricing that had been underway, with the July hike probability lifting to near 80% priced by Friday’s close.

The RBNZ’s GDP now released on Friday continues to hover around zero for Q2 while the early Q3 indicator was seen at around 0.6%, tracking in-line and higher respectively compared to the projections in the May MPS. The current implied path out one year has moved to align reasonably closely to the average quarterly OCR projections contained in the last MPS, with perhaps only the Q4 average implied a little wide of the mark, tracking under at 2.72% against the projected 2.84%. It is perhaps this Q4 path that likely attracts a little more statement risk with December pricing sitting currently around the mid-point between two and three tightenings. Over the week we saw the July meeting lift to 2.45% from 2.41%, 2-year IRS close at 3.38%, 6-points higher week on week, while 10-year IRS finished at 4.10% (+8-points w/w).

Internationally, we saw a degree of Fed-speak that continued to land a little on the side of hawkish. Some members noted more broad-based inflation pressures, less than restrictive policy, and the possibility of having to fight more persistent inflation. New Fed chair, Warsh, re-iterated the commitment to price stability, noting that inflation risks had come down in the past few weeks. Warsh’s comments did see a fine-tuning of the US short-curve with tightening pricing pivoting around year-end, 2026 seeing reductions in priced probability, and 2027 a lift. A weaker than expected payrolls number included a lower participation rate that masked a headline rate increase, added to the rally to a degree, as the market removed around 5-points of priced tightening post release.

The RBA minutes release continued to indicate wariness around inflation noting moves by other central banks to contain second-round effects and markets expecting policy tightening from others. They noted that conditions domestically had moved to be somewhat restrictive with this starting to be transmitted into the broader economy though overall capacity pressures remained elevated and inflation outside band. The committee also noted recent wage awards and how this may reflect second-round effects, with discussion around how this may influence other settlements going forward. Overall, despite the continued caution on the inflation front shown by the RBA, the Australian curve continues to price another tightening at less than 50%.

For Wednesday’s RBNZ decision, the market has come down on the side of tightening, and understandably so. The rationale for the no-move at the May meeting included global uncertainty, weaker confidence and spending domestically, and the desire of the committee to avoid unnecessary economic volatility, per the remit. The RBNZ also noted in the concluding paragraph that the OCR would most likely need to increase sooner and by more than envisaged in the February MPS, a signal of a clear tightening bias despite the hold. Looking at developments since the last review, we note the stronger starting point for the economy indicated by Q1 GDP, including the prior period upward revisions, and the general lift in consumer and business confidence in line with an unwinding of a degree of global economic uncertainty. Inflation expectations measures, while reduced, remain above band. You might also include a weaker than projected TWI adding potential further policy accommodation as per the old Monetary Conditions Index, and tightening biases by other major central banks. With economic developments seeming broadly in-line with the prior projections, the rationale applied towards the hold at the last meeting has likely somewhat diminished this time around. Graham Huges – Trader, Financial Markets

In FX - Treading water

Last week the Kiwi dollar broadly treaded water in the first half of the week, capped by strength in the DXY which was sitting around the 101/101.5 levels. The Kiwi opened the week around 0.5645 and traded up to 0.5670 mid-week. The US non-farm payrolls released on Thursday ahead of the 4th of July long weekend disappointed, printing +57k, which took some of the air out of the US Dollar as Fed hike expectations reduced. The Kiwi then traded up to 0.5725 on Friday, closing the week at 0.5711.

This week the focus locally is on the RBNZ’s MPR on Wednesday. Market pricing is sitting at ~75% probability for a rate hike. There are firm arguments either way around whether or not a hike will be delivered, given the lowering of oil prices to around US$71pb. The stronger than expected GDP print in Q1 and upward revision to the Q4 print shows that the NZ economy was on firmer footing going into the oil price shocks, so the market is going with the view that the RBNZ will deliver what was intimated at their last policy review and hike now rather than wait. If that comes to fruition then the Kiwi may head into the mid 0.5700’s, and potentially 0.5800 if there is an overtly hawkish tone. Conversely a hold could see the Kiwi in the high 0.5500’s/0.5600mids. The timing of the intended hikes is not really the point in question, but more how far will the RBNZ go into 2027 with bringing the OCR to more neutral levels. Overall we see support for the Kiwi dollar still, as some further Fed hike pricing may unwind if US data points to further reductions in inflationary pressures. The Fed’s Kevin Warsh last week indicated that he sees the risks to inflation in the US less to the upside now, and the hawkish view may run out of steam.

Similar to the NZDUSD, the NZDAUD cross has also treaded some water over the last week or so, and the MPR on Wednesday is perhaps going to be more impactful on this cross come Wednesday. After opening last weeks at 0.8180 the cross moved up to a mid-week high of 0.8244 closing the week at 0.8233. With the RBA considered to be on hold (although keeping a keen eye on inflation), a hike from the RBNZ should see the cross higher towards 0.8300+. Downside is likely limited to 0.8150 in a hold scenario. Mieneke Perniskie – Senior Dealer, Financial Markets

The Week's Key Events:

• Coming up this week in NZ, the ANZ Commodity Price Index is out at 1pm Monday. But all eyes are on the RBNZ interest rate decision on Wednesday afternoon, and the press conference which will follow. We have a short week ahead, with Matariki celebrations this Friday.
• The war in the Middle East is easing off, and the Strait of Hormuz is partially open. Global uncertainty is still high, and risk of back-peddling on peace agreements are elevated. Cautious or not, the oil prices are bottoming out and remain low for the time being, bringing with them good news of lower inflation risks domestically.
• In Australia, Melbourne Institute Inflation and ANZ-Indeed Job Ads are out today (Monday). We are also expecting monthly PPI and Retail sales from Europe this evening. Turning to the US, we have Final Services PMO and ISM Services PMI out on Tuesday as well as the Federal Open Market Committee (FOMC) minutes.