• RBA’s Orr says high rates still needed
• New Zealand releases inflation Expectations on Tuesday

The New Zealand dollar is lower on Monday. In  the European session, NZD/USD is trading at 0.6127, down 0.35%. The New Zealand dollar ended the week on a high note, gaining 0.86% against the US dollar on Friday.

RBA’s Orr says restrictive policy must continue

Reserve Bank of New Zealand Governor Orr told a parliamentary committee on Monday that inflation was still too high and the RBNZ would need to maintain its restrictive monetary stance.

Orr’s comments signaled a pushback against rate cut expectations, as the markets had priced in a cut as early as May. Orr said that the current inflation rate of 4.7% was still too high and the RBNZ was focused on lowering it to around 2%.

The RBNZ last raised rates in April 2023 and although the central bank hasn’t acknowledged that the rate-tightening cycle is over, the markets have assumed as much and have looked ahead to rate cuts. However, last week’s employment report was stronger than expected, with job growth rebounding 0.4% in the fourth quarter compared to -0.2% in the third quarter. This has dampened market expectations of a rate cut in May, as strong data reduces pressure on the central bank to lower rates.

The RBNZ’s steep rate-tightening cycle, which has raised the benchmark rate to 5.5%, has significantly lowered inflation but there is more work to be done. Orr & Co. wouldn’t mind maintaining rates in restrictive territory in order to continue pushing inflation lower.

We’ll get a look at New Zealand inflation expectations for the first quarter on Tuesday, which could move the New Zealand dollar. In the fourth quarter, inflation expectations eased to 2.76%, down from 2.83%, which was its lowest level in two years.

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