New Zealand Dollar Slips as Inflation Expectations Fall

The New Zealand dollar took a hit on Thursday after a surprise reading on inflation expectations from the Reserve Bank of New Zealand (RBNZ). The one-year outlook for inflation fell sharply to 2.6%, down from 3.4% in the previous quarter, which is back to where it was before the Iran war drove up fuel prices.

This news was welcome by the RBNZ, but senior economist Satish Ranchhod at Westpac noted that core inflation was still high even before the Middle East conflict and business surveys pointed to ongoing pressure on operating costs. Despite this, investors are still betting heavily on a September rise in the 2.5% cash rate.

The New Zealand dollar lost 0.5% to a two-week low of $0.5829, with bear targets set at $0.5762 and $0.5627. Meanwhile, the Australian dollar eased to $0.7048 after touching a 10-week high of $0.7091 overnight.

Reserve Bank of Australia Assistant Governor Christopher Kent emphasized that the risks on inflation and rates were very much to the upside. Markets are pricing around a 70% chance of one last move to 4.60% by early next year, with some expecting the board to remain on hold before gradual normalisation towards less restrictive policy from mid next year.