Traders and economists are losing hope that interest rate cuts could occur in the first half of 2024 after discouraging data updates

Three key economic updates released over the summer period have helped convince market traders that the Reserve Bank (RBNZ) may keep interest rates high, as it signalled in November.

Analysis by ANZ published on Friday showed bond traders were pricing in a small chance of a rate hike in February, April, or May and no full 25 basis point cut until August. 

This represents a change of heart compared to the end of 2023 and early January, when a full cut was priced into the market for May — if not even sooner.

Since then, there have been three new developments. First, Consumers Price Index data showed headline inflation was falling but largely due to lower imported prices. 

Then Paul Conway, the RBNZ’s Chief Economist, gave a speech downplaying the importance of Gross Domestic Product revisions and, finally, labour market data showed employment remained resilient. 

These were interpreted as signs that inflation may not be in freefall and the central bank would not be willing to ease monetary policy settings in the next few months.

Enemies, foreign and domestic 

Kelly Eckhold, Chief Economist at Westpac NZ, said this local data was reinforced by other monetary policy news overseas. 

In the United States, there was a very strong employment report and a TV interview with Chairman of the Federal Reserve Jerome Powell, who said rate cuts were still some time away.

Then the Reserve Bank of Australia released a hawkish monetary policy statement, suggesting there was a possibility of another rate hike this year. 

“Markets rightfully concluded the chance of a rate cut in the first half of the year are looking pretty remote, and have even priced in a 25% chance of 25-basis-point interest rate hike when [the RBNZ] meets this month,” Eckhold said in a video update.

He said this was “a bit overdone” but the new data could suggest rates will be held at 5.50% until 2025 as the central bank “squeezes sticky inflation out of the economy”.  

Many traders and economists remain sceptical of this view. Market pricing suggests many expect the Official Cash Rate to finish 2024 below 5% and continue to fall in the first half of 2025.

Longer-term mortgage rates have drifted lower over the summer as well, although they are still higher than were in the middle of 2023.

Westpac cut many of its fixed mortgage, and some term deposit, rates on Friday, the first of the major banks to do so.