RBNZ: On Hold, Considered Cutting Rates By 25bps, Awaiting More Information
As widely expected, the RBNZ held the policy rate steady at 3.25%. This was in line with the sell-side consensus (although some forecasters saw risks of a 25bps cut), while market pricing only gave a very small chance to a cut today.
- The RBNZ gave a nod to stronger near term inflation pressures, it noted: "Annual consumers price inflation will likely increase towards the top of the Monetary Policy Committee’s 1 to 3 percent target band over mid-2025. However, with spare productive capacity in the economy and declining domestic inflation pressures, headline inflation is expected to remain in the band and return to around 2 percent by early 2026."
- On growth, it saw supports from higher export prices and lower interest rates. It noted the better Q4/Q1 growth trends but recognized softer trends more recently (April and May figures). It expects the lower rates backdrop (along with higher commodity prices) to support a gradual recovery in activity.
- The central bank emphasized considerable uncertainty around both the domestic and international economic outlooks. On the international side this reflected the tariff/trade outlook. Locally, the RBNZ noted: "The Committee noted uncertainty about the speed with which the domestic economy would continue recovering. Some members highlighted that prolonged economic uncertainty might induce further precautionary behaviour by households and firms. "
- Still, it added: "In contrast, other members emphasized stronger household consumption and business investment in the March quarter, along with higher surveyed investment intentions in the June quarter, as possible signals of a recovery in interest rate sensitive parts of the economy."
- The RBNZ considered two options at this meeting, to cut by 25bps or hold policy steady. The case to ease largely reflected concerns around faltering economic momentum. The case to hold won out, amid high uncertainty: The RBNZ noted: "Some members emphasized that waiting would allow the Committee to assess whether weakness in the domestic economy persists, and how inflation and inflation expectations evolve."
- The central bank maintained an easing bias, subject to medium term inflation pressures easing.
- Note that Q2 CPI for NZ prints on July 21.
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CHINA: Little Reaction To Inflation Daa, CNY & Equities Following Broader Trends
China asset markets aren't showing a strong reaction to the May inflation data. To recap, the CPI remain in deflation, albeit slightly above market expectations (-0.1%y/y, versus 0.2% forecast). The PPI continued to show worsening deflation at -3.3%y/y (-3.2% was forecast and prior was -2.7%). USD/CNH is down slightly, last near 7.1845/50. Broader USD sentiment is struggling to hold Friday's gains, the BBDXY last down 0.20%, which is likely aiding CNH, albeit with the usual lower beta.
- Local equities are up +0.30% for the CSI 300, last above 3880, so within recent ranges. Hong Kong markets are +1.35%. We have US-China trade talks resuming in London later, while some softening in China's rare export stance (for both the US and EU) may be helping aid sentiment ahead of the talks.
- Bond yields onshore are not showing a strong direction trend, the 10yr last 1.68%, while the 2yr was near 1.4%, still close to recent lows.
- Inflation data underscore the need for on-going policy support to maintain domestic momentum to avoid further deflationary pressures. Onshore media suggests infrastructure spending will spending will pick up while incremental policy shifts are also likely (see this link).
- Very large scale stimulus seems unlikely unless US-China trade talks break down and high tariffs by the US are reinstated.
CHINA DATA: CPI Remains In Deflation, Risks From Trade War Persist
China’s May CPI inflation remained weak at -0.1% y/y, slightly better than consensus expectations, while core picked up 0.1pp to 0.6% y/y, the highest since January. Producer prices deteriorated further falling 3.3% y/y after -2.7% in April and the weakest since July 2023, signalling some possible upcoming downward pressure on headline inflation. Services & manufacturing PMIs signal a further softening in prices.
- Price wars have pushed prices into deflationary territory and kept them there. There is a significant risk that the CPI will stay negative due to trade tensions with the US, although talks are scheduled to continue today, as well as continued soft demand and intense competition.
- Lower oil prices and negative base effects pushed producer prices further into deflation. Also significant inventory building before the US announced a 90-day reprieve to its punitive tariffs on imports from China pushed input prices lower. Weaker fuel prices would have also impacted headline CPI.
- While talks to come to a trade deal with the US are ongoing, a return to a trade war would likely pressure China’s domestic demand and push prices further into deflation.
- China’s CPI is expected to rise 0.3% y/y this year with PPI -2% y/y, according to a Bloomberg survey.
China CPI vs PPI y/y%
Source: MNI - Market News/LSEG
CHINA PRESS: China Vows to Enhance Dialogue On Rare Earth Export Control
China has approved a number rare earth export applications and will enhance communication with relevant countries, a spokesperson from the Ministry of Commerce said on Saturday. The ministry emphasised that implementing controls on rare earths, which have both civilian and military applications, aligns with international practices. The ministry was willing to establish a green channel and accelerate approvals to European Union firms. (Source: Securities Times)
