Westpac forecasts the Reserve Bank of New Zealand (RBNZ) will hold its Official Cash Rate (OCR) at 2.25% at the July 8 monetary policy meeting. The Australian bank cited a sharp drop in international oil prices following Middle East ceasefire agreements, which significantly reduced inflation risks. Dubai crude prices have fallen approximately $40 per barrel from their May peak, altering the economic backdrop that shaped the hawkish tone of the May Monetary Policy Statement.
Oil Price Drop Reduces Inflation Pressure
Westpac noted in its July 6 report that the economic background has changed substantially over the past six weeks. During the May Monetary Policy Statement (MPS), three Monetary Policy Committee (MPC) members voted for a rate hike, reflecting a hawkish stance. The subsequent collapse in oil prices has since eased inflationary pressures that previously concerned policymakers.
Market Overprices July Rate Hike Probability
The Overnight Index Swap (OIS) market currently prices an 80% probability of a 25 basis point rate hike in July. Westpac characterized this pricing as excessive, stating that markets have misinterpreted RBNZ's forward guidance as a confirmed rate increase rather than a conditional outlook tied to economic data.
Westpac Expects RBNZ to Re-anchor Market Expectations
Westpac anticipates the July meeting will focus on re-anchoring market expectations to economic indicators rather than fixed policy paths. The bank expects a unanimous hold decision without formal voting, contrasting with the divided vote in May. Westpac added that RBNZ will likely maintain a tightening bias, keeping the door open for future rate increases. The bank noted that inflation remains above RBNZ's previous estimates, suggesting the central bank may signal a first rate hike in September rather than the previously anticipated year-end timing.
NZD-USD to Trade in Box Range Near 0.5625
Westpac projects the New Zealand dollar against the US dollar (NZD-USD) will remain range-bound in the near term. The bank stated the currency will likely stay around the lower end of its box range at approximately 0.5625 until RBNZ policy changes become visible. Westpac assessed that downside pressure on the currency will be limited in the short term.
FAQ
What did Westpac forecast for the RBNZ meeting on July 8?
Westpac forecasts the Reserve Bank of New Zealand will hold its Official Cash Rate at 2.25% at the July 8 monetary policy meeting, citing reduced inflation risks from falling oil prices.
Why does Westpac believe the OIS market is mispricing the July meeting?
Westpac stated the Overnight Index Swap market's 80% probability of a 25 basis point hike in July is excessive because markets misinterpreted RBNZ's forward guidance as a confirmed rate increase rather than a data-dependent outlook.
What is Westpac's outlook for the New Zealand dollar?
Westpac expects NZD-USD to remain range-bound near 0.5625 until RBNZ policy changes become visible, with limited short-term downside pressure on the currency.
