The Reserve Bank of New Zealand kept rates unchanged and did not tweak the projected rate path substantially. The new forecasts include a very marginally revised peak in the OCR at 5.60% as opposed to 5.69% in the November forecast, which lowers the implied probability of a hike to around 40%. The statement from the central bank, however, showed a clearer softening in the threat of more tightening.

The inflation forecast was revised lower to align it with recent figures, but it is unchanged when it comes to the medium term. Headline CPI is still seen at 2.5% in 4Q24, and non-tradeable CPI projections were also unchanged at 3.4% for the end of this year.

We would have thought a real dovish pivot were required to deal a hit to the New Zealand dollar, which instead has dropped over 1.0% since the release. This is probably due to some unwinding of recently growing net-long positions on NZD and the fact that some investors were still expecting a rate hike this week. Our view in the medium term for New Zealand and NZD is – however – unchanged, given the content of this meeting and that new forecasts were in line with what was discussed in our latest NZ note. NZD is due to benefit from an attractive carry for longer thanks to a more problematic disinflation path.

In Australia, January inflation was unchanged at 3.4%, below the 3.6% consensus. That contributed to the Aussie dollar’s weakness this morning, with some of that weakness also a consequence of the RBNZ decision. Our economics team remains worried about the prospects of disinflation in Australia, and we expect higher inflation in February and towards the middle of the year before a clearer downward path re-emerges. We do not exclude another rate hike by the RBA, and we still think AUD looks attractive in the medium term.

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