New Zealand 2-year yield drops 3bps following 2Q CPI below estimates

New Zealand 2-year yield drops 3bps following 2Q CPI below estimates

The New Zealand 2-year yield has dropped by 3 basis points (bps) following the release of the 2Q CPI data, which came in below market estimates. This development has sparked a reassessment of the Reserve Bank of New Zealand's (RBNZ) monetary policy stance and its potential impact on the New Zealand dollar (NZD).

The latest CPI data for the June quarter showed an inflation rate of 0.30%, slightly lower than the consensus forecast of 0.50%. This unexpected outcome has led to a downward revision in expectations for future interest rate cuts by the RBNZ. The market had been anticipating a further reduction in the Official Cash Rate (OCR) in August, but the lower-than-expected inflation figure has put that scenario into question.

Roger J. Kerr, Executive Chairman of Barrington Treasury Services NZ Limited, commented on the implications of the CPI data for the NZD/USD exchange rate. Kerr noted that if US inflation does not increase to the levels feared by the Federal Reserve, the Fed may cut interest rates earlier and larger this year, devaluing the US dollar. This dynamic could potentially boost the NZD, as the interest rate differential between New Zealand and the US narrows.

Additionally, the lower-than-expected inflation in New Zealand may also influence the RBNZ's decision-making process. If the RBNZ holds off on further rate cuts, it could provide a supportive environment for the NZD, especially if the USD weakens due to US monetary policy easing.

However, it is important to note that the NZD has been lagging behind the EUR/USD exchange rate over the past six months. This discrepancy can be attributed to several factors, including New Zealand's lower interest rates and its dependence on the Chinese economy, which has been relatively resilient despite Trump's tariffs.

In conclusion, the 2Q CPI data has led to a downward revision in the New Zealand 2-year yield and has sparked a reassessment of the RBNZ's monetary policy stance. The potential impact on the NZD will depend on how the RBNZ responds to the lower-than-expected inflation and the evolving dynamics of the US and global economies.

References:
[1] https://www.interest.co.nz/currencies/134301/roger-j-kerr-says-if-us-inflation-doesnt-increase-levels-feared-federal-reserve