The Reserve Bank of New Zealand is widely expected to refrain from raising its key overnight lending rate in January as the economy continues to battle slow wage growth, weakness in the housing market, and a high unemployment rate. As market participants rule out a rate hike, comments subsequent to the rate announcement are likely to dictate price action.
Ahead of the release, traders are pricing in a zero percent chance that the RBNZ will raise its key overnight lending rate twenty five basis points, according to the Credit Suisse Overnight index swaps. Taking a look at the fundamental developments leading up to the rate decision, annualized consumer prices rose less than economists’ expectations in the fourth quarter. The report is concerning due to the fact that inflation is expected to pusher lower in the first quarter of 2011 as business and consumer demand scales back, while housing pressures remained weighed by slow house growth. Recently, house prices in the region fell an annualized 0.9 percent in December to mark the first decline since September 2009. It is also worth noting that credit card spending slid 1.4 percent during the last month of 2010as consumers remain cautious about spending, adding further concerns to New Zealand’s recovery.
All in all, as the economic recovery in New Zealand is slightly off track, I expect the Reserve Bank of New Zealand to refrain from raising its borrowing costs twenty five basis points later on today. Thus, comments trailing the rate decision will likely dictate price action and dovish commentary from the central bank will validate the bearish NZDUSD technical outlook.
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