After recovering to near last week’s best level since the end of July 2016, the GBP NZD exchange rate is edging back down again on a lack of UK data and a more positive outlook on New Zealand monetary policy.
This is despite preliminary results from yesterday’s local council elections indicating a highly successful vote for the Conservative party.
So far the Tories have claimed an additional 165 council seats, which indicates that the party will do very well in the general election next month.
The GBP NZD exchange rate is currently trending around 1.8757, down -0.2%, after survey data revealed optimism from New Zealand’s private sector regarding consumer price growth.
New Zealand firms have lifted their expectations for inflation over the coming two years significantly, hinting at tighter monetary policy from the Reserve Bank of New Zealand (RBNZ).
Three months ago business owners were expecting consumer prices a year from the survey date to grow at a rate of 1.56%, but now anticipate price growth over the coming twelve months of 1.92%.
Two-year expectations were at 1.92% but have now risen to 2.17% – firmly above the RBNZ’s target level.
However, growth expectations have fallen, with projections for GDP averaging 2.81% for the coming year; down from 3.11% at the last survey.
Overall the data suggests the RBNZ may be prompted to tighten monetary policy sooner than initially expected, with the board having signalled in February that the official cash rate (OCR) wasn’t likely to be hiked until the first quarter of 2020.
It is now looking like policy adjustments could be brought forward by more than a year, claims Senior Westpac Economist Satish Ranchhod.
‘We expect the Reserve Bank to hold the OCR at 1.75 percent next week,’ he explains. ‘However, with the inflation environment looking firmer than it has been for the past few years, the RBNZ is likely to give a stronger signal that the next move in interest rates will be up. We expect the RBNZ’s interest rate projections to be more consistent with an OCR hike by late 2018.’
Wednesday sees the RBNZ announce its next round of monetary policy decisions.
While markets aren’t expecting any changes to the official cash rate, the accompanying statement will be closely analysed for clues as to the bias of policymakers on the board.
Thursday will see central bank influence moving the Pound as well, as the Bank of England (BoE) will announce its latest policy decisions.
This will be another ‘Super Thursday’, as the latest iteration of the Inflation Report will also be published alongside the policy announcements and the meeting minutes.
Considering consumer price growth continues to trend above-target and the latest PMIs have shown the economy seems to have rebounded from the Q1 slowdown, the Monetary Policy Committee (MPC) may start to sound more hawkish on the potential for interest rate hikes.
This could help keep the GBP NZD exchange rate on the advance, as monetary tightening is likely to arrive in the UK well before it does in New Zealand.