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Just one day after the announcement of the new interest rate decision in New Zealand, ANZ registered a sizable drop in the total business confidence index in the country following the marked deterioration of expected future growth and increased uncertainties concerning global trade. According to ANZ research:
“Headline business confidence reversed May’s lift, down 6 points to net-38% in June’s ANZ Business Outlook. However, firms’ views of their own activity fell just 1 point to +8%. […] Inflation indicators were mixed: pricing intentions fell, reported cost pressures were unchanged, and inflation expectations lifted slightly” [source]
The index is now standing at -38.1%, which is a level that has been last seen in September 2018. The deteriorated economic expectations of local businesses are concerning news for the RBNZ, which might be compelled to lower the interest rates during the next session of the MPC if the sentiment does not improve.
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The worse-off business confidence index can be anticipated to deter business investment and hamper economic activity in the country, which would subsequently impede spending and the overall inflation rate. For comparison, during Q2 of 2018, the business confidence had fallen to around -50%, which resulted in the reduction of the inflation rate to 1.1% following the slump in aggregate expenditure.
Image source: TradingEconomics.com
It is because of this inverted relationship between inflation and the business confidence index that the RBNZ would be monitoring very closely the forthcoming developments in the attitudes and sentiments of local businesses, which are undoubtedly going to influence the next interest rate decision of the central bank.
Surprisingly, the price action for the NZDUSD pair remained initially unaffected by the news, as investors and traders are focused on the G20 summit and the undergoing discussions between Donald Trump and Vladimir Putin. However, additional volatility can be projected to hit the currency pair in the following week, as more investors start to weigh in on the increased likelihood of interest rate cuts by the RBNZ.
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