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RBNZ cut the Official Cash Rate (OCR) by 50bps to 3.75%, as widely expected, while maintaining a clear easing bias.

The central bank stated that "if economic conditions continue to evolve as projected, the Committee has scope to lower the OCR further through 2025." According to the latest projections, the OCR is expected to decline to 3.1% by year-end and remain at that level until early 2028.

RBNZ acknowledged that economic activity remains subdued, though it expects growth to recover in 2025, driven by lower interest rates encouraging spending. However, elevated global economic uncertainty is likely to weigh on business investment. The bank also noted that inflation is expected to be volatile in the near term, influenced by a weaker exchange rate and higher petrol prices.

Regarding global risks, the RBNZ flagged concerns and warned that higher global tariffs could slow growth in key trading partners, dampening demand for New Zealand exports and weakening domestic economic momentum over the medium term.

However, the impact on inflation is "ambiguous", depending on factors such as trade diversion, supply-chain adjustments, and financial market reactions.

Full RBNZ statement here.

Annual consumer price inflation remains near the midpoint of the Monetary Policy Committee’s 1 to 3 percent target band. Firms’ inflation expectations are at target and core inflation continues to fall towards the target midpoint. The economic outlook remains consistent with inflation remaining in the band over the medium term, giving the Committee confidence to continue lowering the OCR.

Economic activity in New Zealand remains subdued. With spare productive capacity, domestic inflation pressures continue to ease. Price and wage setting behaviours are adapting to a low-inflation environment. The price of imports has fallen, also contributing to lower headline inflation.

Economic growth is expected to recover during 2025. Lower interest rates will encourage spending, although elevated global economic uncertainty is expected to weigh on business investment decisions. Higher prices for some of our key commodities and a lower exchange rate will increase export revenues. Employment growth is expected to pick up in the second half of the year as the domestic economy recovers.

Global economic growth is expected to remain subdued in the near term. Geopolitics, including uncertainty about trade barriers, is likely to weaken global growth. Global economic activity is also likely to remain fragile over the medium term given increasing geoeconomic fragmentation.

Consumer price inflation in New Zealand is expected to be volatile in the near term, due to a lower exchange rate and higher petrol prices. The net effect of future changes in trade policy on inflation in New Zealand is currently unclear. Nevertheless, the Committee is well placed to maintain price stability over the medium term. Having consumer price inflation close to the middle of its target band puts the Committee in the best position to respond to future inflationary shocks.

The Monetary Policy Committee today agreed to lower the Official Cash Rate by 50 basis points to 3.75 percent. If economic conditions continue to evolve as projected, the Committee has scope to lower the OCR further through 2025.

Summary Record of Meeting – February 2025

Annual consumer price index (CPI) inflation is sustainably within the Monetary Policy Committee’s 1 to 3 percent target range, and measures of core inflation are continuing to converge to the midpoint. Measures of firms’ inflation expectations sit close to the target mid-point.

A period of restrictive interest rates has reduced demand in the New Zealand economy and contributed to lower inflation. Subdued global economic activity, falling net immigration, and lower government consumption have slowed domestic demand. Increased policy uncertainty associated with global trade developments is also expected to decrease business investment. Headline inflation is expected to increase in coming quarters but remain within the target band. This increase reflects a lower New Zealand dollar exchange rate and higher oil prices. The Committee expects these relative price shifts will not affect inflation over the medium term. Expectations of future inflation, the pricing intentions of firms, and the degree of spare productive capacity are consistent with the CPI inflation target being sustainably achieved. This provides the context and the confidence for the Committee to continue lowering the OCR, and at a faster pace than projected in November.

Global economic activity is expected to remain subdued

The Committee noted that GDP growth for many of our main trading partners remains below potential. In contrast, economic growth in the US has remained strong. Trading partner GDP growth is assumed to decline slightly over 2025. Global economic uncertainty has risen significantly since November, following recent trade policy announcements by the United States. In the near term, we expect that heightened economic uncertainty will constrain business investment amongst our trading partners and in New Zealand.

Global headline inflation has increased modestly, reflecting higher energy prices

The Committee discussed inflation amongst New Zealand’s trading partners. Headline inflation has declined over the past year but has increased slightly in recent months. The recent increase in headline inflation in many of our trading partners is largely accounted for by higher fuel and energy prices. Market participants expect most central banks in advanced economies to continue reducing policy interest rates over the coming year. Market pricing implies that US policy rates are projected to fall by less than assumed at the time of the November Statement.

GDP growth in New Zealand is expected to rise, reducing spare capacity in the economy

The Committee discussed recent domestic economic developments. Domestic economic activity remains below trend. This reflects falling activity in interest rate sensitive sectors such as construction, manufacturing, retail trade, and business investment. In contrast, activity in the primary sector has increased. New Zealand’s export prices have held up, despite subdued global growth. Global supply conditions in beef and dairy markets have supported export prices. This, coupled with a lower New Zealand dollar exchange rate, will increase export sector incomes in New Zealand.

Timely indicators of economic activity, including a range of business surveys, have improved in recent months. Lower interest rates and higher export earnings are expected to support economic growth. The pace is expected to be modest, as potential GDP growth is constrained by ongoing weakness in productivity growth and lower net immigration. Government spending is expected to decline as a share of the economy over the medium term, in line with the Half-Year Economic and Fiscal Update 2024.

GDP revisions better explain the evolution of core inflation over the past two years

GDP data was revised significantly since the November Statement. These revisions show that the level of New Zealand’s economic activity in 2024 was higher than assumed in November. However, the revisions show the New Zealand economy experienced a larger contraction during the middle of 2024. Overall, there is significant spare capacity in the economy, and slightly more than we had assumed in November.

The new profile for GDP helps explain the evolution of core inflation and broader measures of capacity pressure over the past two years. The higher level of GDP over the start of 2024 aligns with the signal taken from high frequency data at the time. The subsequent decline in GDP over the middle of 2024 also aligns more closely with high frequency data, which was one of the factors that contributed to a downwards revision to the OCR outlook in August.

Employment remains subdued, but is expected to improve later this year

The Committee discussed conditions in the New Zealand labour market. Wage growth is slowing, consistent with lower demand for workers and lower CPI inflation. Employment levels and job vacancies have declined, reflecting subdued economic activity. As employment growth typically lags economic growth, it is expected to pick up in the second half of the year. Net immigration to New Zealand has reduced significantly from high rates over recent history. The number of migrant arrivals has slowed over the past year, and departures of New Zealanders have increased, partly in response to subdued labour market conditions relative to Australia.

Lower OCR continues to pass through to mortgage and term deposit rates

The Committee noted that wholesale interest rates in New Zealand have generally declined since the November Statement, in response to a lower OCR and weaker-than-expected economic activity. This decline in wholesale interest rates has been reflected in lower mortgage and term deposit rates. The average interest rate on outstanding mortgages has now peaked and is expected to decline over the next 12 months as borrowers refix their mortgage interest rates at lower levels.

The financial system remains stable

The Committee agreed that there is currently no material trade-off between meeting inflation objectives and maintaining financial system stability. Some households and businesses are continuing to experience financial stress. While non-performing loans remain low compared to past recessions, some financial stress will persist in the near term, even as the economy recovers. The banking system remains well capitalised and in a strong financial position to support customers.

Inflation is expected to remain within the target band

The Committee discussed domestic inflationary pressure. Headline CPI inflation and firms’ inflation expectations at all horizons are close to the target mid-point. Measures of core inflation continue to converge on the target mid-point. Surveyed household inflation expectations remain more elevated and volatile.

Non-tradables inflation has fallen but remains high. With spare productive capacity remaining in the economy over the next 12 months, the Committee is confident that domestic inflationary pressures will continue to abate.

Headline inflation is expected to increase in coming quarters, reflecting a lower New Zealand dollar exchange rate and higher oil prices, but remain within the target band. However, underlying inflationary pressures are expected to continue to ease, and annual headline CPI inflation is forecast to remain near the 2 percent mid-point once the effect of recent increases in petrol prices on inflation wanes. The near-term increase in headline inflation is unlikely to significantly affect wage- and price-setting behaviour given excess capacity in the economy. The Committee noted that the monetary policy remit directs it to discount disturbances in inflation that are expected to be temporary, in a manner consistent with meeting the medium-term inflation target.

There are near-term risks to the economic outlook

The Committee discussed near-term risks to the outlook. The Committee noted that while lower interest rates are expected to underpin a recovery in the domestic economy, the speed and timing of the recovery is uncertain. In particular, recent revisions to June and September 2024 quarter GDP growth suggest momentum in the economy was considerably weaker than previously measured. The Committee noted that tighter international financial conditions presented downside risks to global growth, particularly for those countries with high debt levels or fixed exchange rate regimes. The Committee discussed global asset markets and the risk of a fall in equity prices if elevated earning projections are not realised, or if market participants reassess their appetite for risk.

There is a risk of increased trade barriers and broader geoeconomic fragmentation

The Committee discussed the risks posed by increased trade barriers. Over the medium term, these trade barriers could be increased much further. This is not currently incorporated into our central projection given uncertainty about the timing and magnitude of any potential changes. This uncertainty is heightened given trade protection is being used to pursue both economic and geopolitical goals.

Increased trade barriers will reduce global productive capacity. As a small open economy, New Zealand cannot avoid being affected by these international developments. Monetary policy cannot offset the long-term negative supply-side effects of higher barriers to international trade. More generally, global economic activity is likely to be more exposed to economic shocks given increasing geoeconomic fragmentation.

An increase in trade restrictions is likely to reduce economic activity in New Zealand. But the effects on inflation are uncertain, as these depend on how trade disruptions transmit through the global economy. Such shocks are likely to take time to materialise, giving the Committee flexibility to react as necessary. Any monetary response will depend on the impact of trade restrictions on medium-term inflationary pressures.

The global economy faces a range of structural challenges

The Committee discussed the long-term structural challenges faced by the economy in China and the broader region. In addition, the Committee noted that geopolitical and climate-related risks pose uncertainty over the medium term. There may be higher relative price volatility and more unpredictability in headline inflation. The Committee agreed that having consumer price inflation close to the middle of its target band puts it in the best position to respond to any shocks to inflation.

The Committee agreed to lower the OCR

With headline CPI inflation close to the midpoint, measures of core inflation converging on the midpoint, stable business inflation expectations, and significant spare capacity in the economy, the Committee agreed that a further reduction in the OCR was appropriate. The Committee agreed that a 50 basis point reduction would be consistent with their mandate of maintaining low and stable inflation, while seeking to avoid unnecessary instability in output, employment, interest rates and the exchange rate. If economic conditions continue to evolve as projected, the Committee has scope to lower the OCR further through 2025. On Wednesday 19 February the Committee reached a consensus to lower the Official Cash Rate by 50 basis points to 3.75 percent.

Attendees

MPC Members: Adrian Orr (Chair), Bob Buckle, Carl Hansen, Christian Hawkesby, Karen Silk, Paul Conway, Prasanna Gai
Treasury Observer: James Beard
MPC Secretary: Adam Richardson

Australia’s wage price index rose 0.7% qoq in Q4, marking a slowdown from 0.9% qoq and missing expectations of 0.8% qoq. This matches the lowest quarterly growth since March 2022, reinforcing signs that wage pressures are easing, albeit still elevated.

On an annual basis, wages increased 3.2% yoy, making it the slowest pace since Q3 2022. Private sector wage growth came in at 3.3% yoy, the weakest since Q2 2022. Public sector wages rose 2.8% yoy, falling below 3% for the first time since Q2 2023.

Full Australia wage price index release here.

Japan’s trade deficit expanded sharply in January, reaching JPY -2.759T, the largest shortfall in two years, as imports surged 16.7% yoy, far exceeding the expected 9.3% yoy gain.

Meanwhile, exports rose 7.2% yoy, falling slightly short of the 7.7% yoy forecast, with strong shipments to the U.S. (+18.1% yoy) offset by a -6.2% yoy decline in exports to China.

On a seasonally adjusted basis, exports declined -2.0% mom to JPY 9.253T, while imports climbed 4.7% mom to JPY 10.109T, leading to a JPY -857B trade deficit.

• Geopolitical tensions continue to support gold prices despite talks between the US and Russia, and a potential phase two deal between Israel and Hamas.
• Gold has held above the $2900/oz level to start the week, but the RSI indicates it is in overbought territory.
• The article identifies key support levels for gold at 2924, 2913, and 2882, and resistance levels at 2937, 2942, and 2950.

Risk aversion persisted in the markets today, even as a U.S.-Russia meeting in Saudi Arabia sparked hopes for a potential decline in safe-haven demand. Additionally, reports emerged of a phase two agreement being reached between Israel and Hamas.

Both developments carried the expectation of easing the geopolitical tensions that have weighed on global sentiment over the past 12 to 18 months. However, these events have so far failed to significantly alleviate the sense of geopolitical risk, keeping haven demand firmly in place.

US-Russia Talks in Saudi Arabia

A US and Russian delegation met in Saudi Arabia today to discuss a potential end to the Ukraine conflict. Market participants may have been eyeing a drop in geopolitics which may lead to a drop in Gold prices as haven demand falls. However this failed to materialize despite reports that the talks were positive.

Key Quotes and Reports from the Meeting from Both US and Russian Officials:

• US, Russia Agree To Appoint Teams To End Ukraine Conflict – US Official
• US Spox Bruce: One Call One Meeting Not Enough For Enduring Peace
• Russia’s Dmitriev: Russian, US Officials Have Separate Discussion On Future Economic Cooperation, Including Global Energy Prices – RTRS
• US, Russia Peace Proposal Would Include Ukraine Elections – Fox
• US State Sec Rubio: US, Russia Agree To Restore Embassy Staffing -AP
• U.S. National Security Adviser Waltz: There Will Be Talks About Territory And Security Guarantees
• US Sec Of State Rubio: Everyone Involved In Conflict Has To Be Part Of Talks
• US Sec Of State Rubio: European Union Needs To Be Involved At Some Point
• US National Security Adviser Waltz: US Allies Are Being Consulted On Ukraine
• US National Security Adviser Waltz: US Is Glad Europe Is Talking About Contributing More Forcefully To Ukraine Security
• Russia’s ForMin Lavrov: We Agreed To Form Process For Ukraine Conflict Settlement
• Russia’s ForMin Lavrov: There Were Also High Interest To Lift Barriers For Economic Cooperation
• Russia’s ForMin Lavrov: European Troops In Ukraine Is Unacceptable For Russia
• Russia’s ForMin Lavrov: I Can Say That Today’s Talks Were Not Unsuccessful

Despite the comments by Russia’s Foreign Minister Lavrov that the talks were not unsuccessful, the road ahead may be a long and bumpy one. Ukrainian President Volodymyr Zelenskiy announced that his visit to Saudi Arabia has been rescheduled for March 10th, as he awaits the arrival of the U.S. delegation in Kyiv. This could explain why markets have not had any meaningful reaction as of yet.

Israel-Hamas Phase Two Deal Appears on Course

In another positive for risk sentiment, both sides appear ready to discuss phase two of the ceasefire. Israeli Foreign Minister Gideon Saar stated that negotiations for the second phase of the hostage deal will commence soon. This view was echoed by Hamas Gaza Chief Hayya, who announced that the group is prepared to begin immediate negotiations for the second phase of the Gaza ceasefire agreement.

Another potential positive for geopolitical risk. Israeli Foreign Minister meanwhile acknowledged he is aware that Arab states are coming up with a plan for Gaza as Egyptian President Sisi is set to travel to Saudi Arabia for discussions. On the flip side however, the Israeli Foreign Minister has said they are unwilling to accept or support a plan that would see civilian control of Gaza transferred from Hamas to the Palestinian Authority.

Tariff Developments and the Week Ahead

The Dollar has so far had a limited impact on Gold prices. We have seen spikes when key data has missed estimates but the precious metal quickly recovers. This is a sign that haven demand and risk sentiment remains skewed in favor of further gains for Gold prices.

Tariffs by the US have heated up as well which continues to support Gold prices. President Trump has said that tariffs on automobiles would come on April 2, while Chinese lithium company Jiangsu Jiuwu Hi-Tech halted exports of processing equipment per LSEG.

Signs that a global trade war remains a massive concern for market participants moving forward.

On the data front, the FOMC minutes will be out on Wednesday followed by S&P PMI data on Friday. Both of these events could lead to a spike in volatility but i do expect any moves to prove short-lived.

Technical Analysis – Gold (XAU/USD)

Gold prices did experience a pullback last week following hotter than expected inflation data from the US. However this proved short lived as prices retested its alltime highs around the 2942/0z handle.

On the daily timeframe the RSI period 14 is back in overbought territory. As we know though, an instrument can remain in overbought territory for extended periods of time.

Gold (XAU/USD) Daily Chart, February 18, 2025

Source: TradingView (click to enlarge)

Dropping down to a four-hour chart H4, markets are in a sort of range with highs around 2937 and lows around 2881.

A rejection at 3937 could lead to a retest of support at 2924 and 2913 before the 2900 comes into focus.

On the upside, a break of 2927 and the all-time high at 2942 will see focus shift toward the 2950 and 2975 resistance handles.

Gold (XAU/USD) Four-Hour H4 Chart, February 18, 2025

Source: TradingView (click to enlarge)

Support

• 2924
• 2013
• 2900

Resistance

• 2937
• 2942
• 2950

• EURGBP broke the support zone
• Likely to fall to support level 0.8265

EURGBP currency pair recently broke the support zone between the support level 0.8300 (which stopped the previous impulse wave i at the end of January) and the 61.8% Fibonacci correction of the upward ABC correction 4 from December.

The breakout of this support zone accelerated the active short-term impulse wave iii of the higher order impulse wave 5 from January.

EURGBP currency pair can be expected to fall to the next support level 0.8265 (former low of the minor correction b from the end of December).

The Japanese Yen (JPY) is trading weakly in the European session but is not falling sharply because many traders believe that the Bank of Japan (BoJ) will raise interest rates again. Additionally, the gap between Japanese and US bond yields is narrowing as investors expect the US Federal Reserve (Fed) to cut interest rates soon. This has helped to limit losses for the Yen.

On the other hand, positive news about a delay in US President Donald Trump's reciprocal tariffs and ongoing peace talks between Russia and Ukraine are reducing demand for the safe-haven JPY. At the same time, rising US Treasury bond yields support the US Dollar (USD), helping it recover from a three-day losing streak and keeping the USDJPY pair positive.

CADJPY – H4 Timeframe

CADJPY has recently broken above the previous high on the 4-hour timeframe chart, leaving an FVG (Fair Value Gap) and a drop-base-rally demand zone behind, near the origin of the bullish momentum. The presence of a trendline support further affirms the bullish sentiment.

CADJPY – H3 Timeframe

The 3-hour timeframe chart of CADJPY shows the price retracing towards the demand zone at the base of the bullish break. This demand also serves as the order block from the SBR (Sweep Break Retest) pattern and overlaps the 76% Fibonacci retracement level. Considering the trendline support's presence, the price is expected to bounce off the demand to resume the bullish impulse.

Analyst's Expectations:

• Direction: Bullish
• Target- 108.667
• Invalidation- 105.088

The British Pound (GBP) is slightly weaker than the US Dollar (USD), down by about 0.2%, while the USD remains strong. According to Shaun Osborne, Chief FX Strategist at Scotiabank, the Pound is struggling to keep its gains despite positive news about wages and jobs in the UK.

Recent data showed that wages in the UK grew by 6.0% for the three months ending in December, which was better than expected. Additionally, more people found jobs than analysts had predicted. This has reduced expectations of interest rate cuts from the Bank of England (BoE), aligning with the BoE’s cautious approach to lowering rates.

Even though the Pound gained some strength last week, it struggled to surpass the 1.2610 level against the USD, a key resistance point. The Pound has been moving around the 1.26 mark for the past two days without making significant progress. If it drops below 1.2580, it could fall further to the 1.2525/30 range.

GBPAUD – H4 Timeframe

The 4-hour timeframe chart of GBPAUD shows the price reacting off the confluence area of a trendline support and a drop-base-rally demand zone. The initial momentum has declined, allowing for a bearish retracement and a possible retest of the trendline support.

GBPAUD – H2 Timeframe

The 2-hour timeframe chart of GBPAUD further clarifies the original bullish sentiment on the higher timeframe. It presents an SBR (Sweep Break Retest) pattern with the demand zone lying around the 88% Fibonacci retracement level. The confluence from the trendline support confirms a bullish sentiment.

Analyst’s Expectations:

• Direction: Bullish
• Target: 2.00705
• Invalidation: 1.95451

The New Zealand dollar is sharply lower on Tuesday. NZD/USD is trading at 0.5700 in the North American session, down 0.62% on the day.

RBNZ expected to chop rates by 50 basis points

The Reserve Bank of New Zealand meets on Wednesday for the first time this year. The RBNZ lowered rates by a half-point at the last meeting on Nov. 27 and the markets have priced in another half-point cut on Wednesday at 90%, which would bring the cash rate down to 3.75%. The central bank held rates for over a year but has aggressively cut rates by 125 basis points in the current easing cycle.

The RBNZ has telegraphed its plan to cut rates by a half-point on Wednesday and we could see a limited response from the New Zealand dollar, since the decision has been priced in. Still, the US/New Zealand rate differential will widen and that could spell headwinds in the near term for the New Zealand dollar, which plunged 13% in the fourth quarter 2024 but has gained 1.9% since Jan 1.

What can we expect from the RBNZ after tomorrow’s anticipated rate cut? The RBNZ’s updated forecasts are expected to show the cash rate declining towards 3 percent, but in smaller increments of quarter-point cuts. This will depend on the strength of the economy and the direction of inflation. Another factor which could affect the rate path is the new US administration which has already started imposing tariffs.

New Zealand is vulnerable to US tariffs as the US is its second-largest trading partner, accounting for about 12% of New Zealand exports. Even if the US does not target New Zealand with tariffs, the trade war between the US and China has clouded the inflation outlook and is will likely hamper global growth.

NZD/USD Technical

• NZD/USD is putting pressure on support at 0.5691. Below, there is support at 0.5643
• 0.5781 and 0.5829 and the next resistance lines