Muted wage growth data out of New Zealand today reinforced expectations that the country’s central bank will likely cut interest rates next week. The Reserve Bank of New Zealand is due to hold its latest policy meeting on August 11 and is widely expected to lower its official cash rate by 25bps to 2.0% as declining inflationary pressures continue to worry policymakers.
Labour costs in the private sector rose
Labour costs in the private sector rose by just 1.6% annually in the second quarter of the year, missing expectations that it would stay unchanged at 1.8%. Quarter-on-quarter growth also disappointed, coming in at 0.4% instead of the expected 0.5%. Wages costs have been rising by less than 2% since late 2012 even though economic growth in New Zealand has been outperforming that of most advanced economies since the financial crisis.
Inflation rates also remain very low with headline CPI at 0.4% in the first half of the year. The stronger exchange rate will likely put further downwards pressure on price levels as the New Zealand dollar has gained about 5% against the US dollar since the start of the year. House prices remain a hotspot though as the annual pace of increase remains in double digits.
In an irregular economic update on July 21, the RBNZ said it was considering stronger macro-prudential measures to curb the rapid growth in house prices, particularly in hotspots such as Auckland. Tighter housing lending restrictions would reduce the risk of a housing bubble if the RBNZ was to cut rates further. The statement fuelled market speculation that the RBNZ was preparing to cut rates in August.
Expectations of lower rates dragged the NZDUSD away
Expectations of lower rates dragged the NZDUSD away from its 2016 peak of 0.7324 set on July 12 (the highest since May 2015). However, a weaker US dollar has since helped the kiwi recover to back around the 0.72 level after briefly falling below 0.70. Fading expectations of a US rate hike anytime soon have reversed some of the greenback’s post-Brexit rebound, pushing commodity-linked currencies such as the New Zealand dollar higher.
Declining sovereign bond yields elsewhere in the world is another factor adding to the kiwi’s resilience as even after the recent cuts, Australia and New Zealand remain among the few advanced economies that have interest rates not close to 0%. Looser monetary policy in major economies such as the Eurozone and Japan have increased the attractiveness of higher yielding currencies like the aussie and the NZDUSD.
Meanwhile, a gradual recovery in dairy prices since late April has also been supporting the NZDUSD. Dairy remains New Zealand’s main export earner and the latest global dairy auction on Tuesday saw prices gaining 6.6% to the highest since January. A further recovery will likely limit the impact of fresh cuts in the cash rate on the NZDUSD.