It's a big week. For us of course, our focus is on the RBNZ’s Monetary Policy Review on Wednesday. After six straight meetings delivering rate cuts, totalling 225bps, the RBNZ looks set to take a breather.

The last time we heard from the RBNZ was, simply put, kind of weird. The May statement read dovish, with forecasts for the Kiwi economy appropriately downgraded. Similar to our house view, the RBNZ were clear to point out that trade uncertainty presents downside risks to growth and inflation. But the communication by RBNZ officials, along with the 1-5 dissenting vote, stopped short in signalling an easing bias consistent with their outlook and OCR track.

Market pricing allows the RBNZ to skip this meeting, and come back in August without causing a stir. Just 3bps of a cut (12% chance) is priced in for Wednesday. For August, the market is pricing in 16bps (just shy of a 65% chance) of a rate cut.

Wednesday’s decision is another case of what we think they should do versus what we think they will do. While a hold is the likely outcome, we recommend a cut. The need for lower rates is clear. The RBNZ themselves have signalled the need for further cuts. So why wait? Yes, there is worry right now about the recent spike in inflation we’re experiencing. But monetary policy makers must look through short-term volatility, even if it’s eye-watering.

Monetary policy is set today to influence the medium-term. And risks to the medium-term outlook are skewed to the downside. A global growth slowdown is expected with US tariffs. NZ export prices may come under pressure. Also, significant spare capacity remains within the Kiwi economy. Both these factors are disinflationary. And we’ve seen that in the QSBO survey. There is a net 2% of firms looking to reduce their prices in the coming months. History tells us that pricing behaviour like that only happens during recessions. All up, the real risk is that inflation undershoots the RBNZ’s 2% midpoint.

While the RBNZ may not pull the trigger this week, we expect them to maintain a dovish bias due to the balance of risks.

Beyond the RBNZ, we’ll also hear from the RBA this week. Meeting tomorrow, the RBA is expected to resume their easing cycle and deliver a 25bp cut to 3.60%. Having been late to hike, the RBA has also been late to cut. A cut tomorrow would mark just the third in this cycle. Compared to the 6 cuts we’ve had here at home. But the tides have turned. While the RBNZ has turned more ambiguous, the RBA has become more dovish. Because Aussie inflation is sitting at the lower end of the RBA’s target band, and the labour market starting to lose its lustre.

And of course, we can’t forget that July 9th (US time) marks the deadline of President Donald Trump's 90 day pause on reciprocal tariffs. Now, with just 3 deals across the line out of the 70+ countries who were set to come to the negotiation table, an extension of some sort seems likely. That, or a mad dash of deals to the finish line for negotiations. Although we’re now also hearing about a more ‘Dear John’ letter-style approach from Trump with the White House set to send letters to countries outlining its new tariff rate.

Still, as we all know, no one can truly predict Donald Trump's next move. We expect a route of de-escalation to remain the path forward. But we remain wary of the risks at present. Just last week, Trump threatened Japan with a 30-35% tariff rate, up from their 23% liberation day tariff, if a deal wasn’t reached before the July 9th deadline. Again, maybe it’s just more big talk, but it’s a reminder that no de-escalation is yet set in stone. And in any case, the ante is high over this week as we wait for developments to unfold.

At least in some semi-positive news, a trade deal was struck between the US and Vietnam last week. Under the deal, the US will now impose a 20% tariff on Vietnamese exports, compared to the 46% announced on Liberation Day, but higher than the 10% of the last 3 months. Additionally, the agreement also sees the US implementing a 40% tariff on any products originating from another country sent through Vietnam for final shipment to the US – a shot likely fired towards China. Meanwhile in exchange, Vietnam is giving the US tariff-free access to its markets.

Financial Markets

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

In rates, the market remains firmly convinced the RBNZ will take the opportunity to pause

“Kiwi rates remained in a fairly tight range through last week despite significant offshore moves and a big dollop of NZGB supply. The market is still firmly convinced the RBNZ will take the opportunity this week to pause and wait for more data with less than a 20% chance of a cut priced. Expectations for a cut not helped by a significant NFP beat where expectations for a July Fed have now faded.

The much anticipated QSBO results were consistent with a modest recovery. But from a RBNZ viewpoint, further muddied the water with sentiment improving but actual reported activity still weak.

The 2031s tap was priced last week, with full 6bio issued and price coming in at tight end of the range. Record orderbook seen as a big vote of confidence for NZGBs. Duration seemingly absorbed without trouble possibly helped by lower allocation to balance sheets.

Though in both the US and UK, monetary policy receded to the background as fiscal dragons loomed into view putting upward pressure on long end yields. The BBB passed into law now set to deliver unsettlingly big deficits for the foreseeable future. While Gilts came under pressure as the UK government looks like it might take off the fiscal hairshirt instead of tax increases or pushing through unpopular spending cuts.

Looking ahead we are in for a busy week we have RBA, RBNZ and tariff deadlines all this week.” Matthew Crowder, Balance Sheet Manager – Treasury.

In currencies, the Kiwi is still driven by the weaker US dollar

“The Kiwi dollar is back into the slightly elevated but well-trodden range of 0.6030-0.6100. We had some positive news last week, with the NZ QSBO survey indicating some optimism. And on the tariff front there was a deal signed between the US and Vietnam. After touching a high of 0.6116 last week, the Kiwi pared gains on the back of the US non-farm payrolls and unemployment prints, which indicated that the US economy may not be in any danger of heading over a cliff any time soon. This saw traders pare back some of the expectations around the Fed cutting rates this month, as they ignored some of the underlying weakness hidden under the headline numbers. The slight upward bias in the US dollar saw the Kiwi head back to 0.6040 before creeping higher to close out the week at 0.6060. We think that this US dollar rally may be short-lived, as the issues plaguing the US dollar are still in motion. One of the emerging themes, quickly gaining traction, is that Trump is putting further pressure on Fed Chair Jerome Powell and is looking to announce his successor very soon. The prospect of a dovish ‘Shadow Board’ is coming to fruition. Tariff talks should also see further turmoil for the US dollar as we get close to the 9 July deadline. Scott Bessent has hinted at a potential 3-week extension on the deadline. This week we have the RBNZ’s MPR, and they are broadly expected to remain on hold but retain their easing bias. Provided there are no surprises to their forward indicators, this places a neutral to cautious bias on the Kiwi interest rate outlook, and this should be Kiwi dollar supportive. We expect further upward momentum towards 0.6125. On the NZDAUD front, with a 95%+ probability of a cut from the RBA this week, if they do not meet the market, we may see some movement in this cross, which has been trading in a very familiar 0.9230-0.9290 range for some weeks now.” Mieneke Perniskie, Trader - Financial Markets.

Weekly Calendar

• Here at home, the RBNZ's July Monetary Policy Review is the main event. Market consensus expects the RBNZ to keep the cash rate unchanged at 3.25%. That will be the first pause since the RBNZ began its easing cycle last August. Risks to the outlook for growth and inflation are still tilted to the downside. Given this, the RBNZ will likely maintain an easing bias.
• A day before the RBNZ, the RBA will announce its latest rate decision. The market expects the RBA to deliver a 25bps cut to bring the cash rate to 3.60%. The RBA's tone clearly turned dovish in May. And since then, the data has evolved in a way that justifies further rate cuts. At 2.1%yoy headline inflation is tracking at the bottom of the RBA's 2-3% target range. Spending by the Australian consumer also continues to disappoint, signalling the need for further rate relief.
• In the US, the FOMC meeting minutes will be of most interest to markets. The latest dot plot still signals 50bps of cuts this year, but views were more spread. Indeed, the minutes will likely reveal a divided committee balancing inflation risks tied to tariffs and a downgraded growth outlook. Fed Chair Powell has remarked that if not for tariffs, the FOMC would likely have cut rates at their last meeting. Wait and see is the approach being taken. And the strength of the US labour market affords the Fed time to move cautiously.

See our Weekly Calendar for more.