New Zealand Rate Decision
The Reserve Bank of New Zealand will announce its latest interest rate decision on the 16th of August. It is expected to hold the official cash rate (OCR) at 5.5% as the inflation rate is expected to decline to 5.8% in Q3 2023 from 6% in the previous quarter. New Zealand was not only impacted by the pandemic and the Russia-Ukraine war, but also it was badly hit by Cyclones Hale and Gabrielle which displaced thousands of people and caused an increase in prices.
New Zealand has finally paused its monetary tightening. It was among the first countries to start raising interest rates in response to the pandemic from October 2021 to reach a 14-year high, as seen below.
Figure 1 New Zealand Interest Rate| Source: Trading Economics based on the Reserve Bank of New Zealand
UK Consumer Price Index (CPI)
Another important economic indicator to be released this week is the United Kingdom’s inflation rate. The CPI is expected to fall by -0.5% MoM and to increase by only 6.8% YoY during July 2023 compared to +0.1% and 7.9% in June, respectively. Core inflation is also expected to decline to 6.8% YoY compared to 6.9% recorded in June 2023.
Due to high inflation, the Bank of England raised the Bank Rate in August by 25 bps to reach 5.25%, the highest level since the 2008 financial crisis. UK employment data has also played a role in easing the inflation rate. Even though an increasing unemployment rate by 20 bps to 4.2% in June is negative in its sense, for economists, it might indicate a lower inflation rate driven by lower competition in the market.
However, wages have been rising at almost the same pace as inflation at 7.8% YoY, the highest rate in 22 years. If wages continue to outpace inflation, it could be seen as significant progress in addressing the cost of living crisis. According to economist Ashley Webb from Capital Economics, although many people will still face financial difficulties, the situation may improve as consumer price inflation is expected to fall below average earnings growth.
Total wage growth, including bonuses, was 8.2% during that period. However, it's important to note that this figure was influenced by one-off bonus payments made in June, particularly in the NHS. In the private sector, wage growth reached 8.2%, the highest annual rate seen since before the pandemic. In the public sector, wage growth was 6.2%, with a rate only surpassed in August to October 2001 when it reached 6.3%.
As a trader, what to expect?
A declining inflation figure means a higher purchasing power of the currency theoretically, thus potentially strengthening the GBP against its peers. However, even if the UK inflation data was lower, it is still higher than the Bank of England's 2% target, as well as compared to other countries. Moreover, the decline in price levels might indicate that the next interest rate decision will either be increased at a slower pace since the main target of increasing interest rates is to curb the inflation rate, which is showing signs of easing. And a rate hike usually weakens currency value. Still, it is important to note that historical patterns do not necessarily guarantee the repetition of the same pattern.
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