RBNZ Rate Decision and Oil Prices in the Spotlight

Investors and traders focus on the Reserve Bank of New Zealand (RBNZ) interest rate decision due tomorrow, while the Reserve Bank of Australia (RBA) kept rates unchanged as some economists suggest that rate hikes have had an impact on inflation and consumer spending.

OPEC+ decision to cut oil production made oil prices surge by 6% on Monday. Commenting on the oil production slash, market analysts said that the US Federal Reserve (Fed) might have to reconsider its plans as higher inflation figures may be on the way.

However, Morgan Stanley has trimmed its oil price forecast for 2023. Morgan Stanley’s strategists wrote in a report: “(the decision) reveals something, it gives a signal of where we are in the oil market. And look, let’s be honest about this, when demand is roaring…then OPEC doesn’t need to cut.”

RBNZ Interest Rate Decision

The Reserve Bank of New Zealand is expected to announce its decision on interest rates on Wednesday. Analysts suggest that the Official Cash Rate (OCR) will likely be raised by 25 basis points.

ASB economists suggest that two more rate hikes could be on the way but note that higher rates have already had an impact on the country’s economy. “The economy may be losing momentum faster than anticipated, implying monetary policy is now starting to bite hard. There is more policy impact to come: the average mortgage rate being paid is only about halfway through its climb from trough to peak,” they note in their report.

Westpac’s economists disagree regarding the number of anticipated hikes as “we’re currently forecasting a peak of 5% for this cycle, though we acknowledge that the risks are skewed towards a higher peak than a lower one. Until the RBNZ gets clear confirmation that the economy is slowing, it will continue to emphasise the potential for further rate hikes.”

RBA leaves interest rates unchanged

The Reserve Bank of Australia (RBA) announced its decision to keep its benchmark interest rate unchanged at 3.60%, after 10 consecutive rate hikes. The decision was in line with economists’ expectations.

The RBA’s governor Philip Lowe said he expects some further tightening of monetary policy may well be needed. The post-meeting statement noted: “The board took the decision to hold interest rates steady this month to provide additional time to assess the impact of the increase in interest rates to date and the economic outlook. The board recognises that monetary policy operates with a lag and that the full effect of this substantial increase in interest rates is yet to be felt. Inflation has peaked in Australia, goods price inflation is expected to moderate over the months ahead.”

Oil production cut triggers price rally

On Sunday, the Organisation of Petroleum Exporting Countries and its allies (OPEC+) announced that it would cut oil production by 1.15 million barrels per day, starting in May. The timing of the decision surprised markets although OPEC+ has vowed to cut production by 2 million barrels per day by the end of 2023.

OPEC+ representatives said that the move intends to support price stability, while some market analysts suggest that the organisation aims at higher profits. Cutting oil production could generate tension between OPEC+ members and western governments as inflation figures had started to drop on the back of lower energy prices.

What do ING and Goldman Sachs think?

The announcement forced ING analysts to amend their forecast regarding oil prices. “These surprise cuts mean a tighter market this year. As a result, we have had to revise higher our oil forecasts for the remainder of 2023. A tighter market means that we now expect higher oil prices. Prior to these announced cuts, we were forecasting Brent to average $97/bbl over the second half of the year. However, we now expect the market to average $101/bbl over this period,” they noted in their updated report.

Economists at Goldman Sachs revised up their forecast regarding Brent prices for December 2023 to $95 per barrel. They also expect the Brent barrel to cost $100 in December 2024. In their report released on Sunday they wrote: “While the move was surprising, the decision reflects important economic and likely political considerations. Output reduction could provide a 7% boost to oil prices, contributing to higher Saudi Arabia and OPEC+ oil revenue. The refusal to refill the US SPR (Strategic Petroleum Reserve (SPR) in fiscal year 2023, although (US benchmark) WTI lows that were previously characterized as sufficient to refill, may have contributed to the OPEC+ decision to cut too.”

ISM Services PMI March data

The Institute for Supply Management (ISM) will release data regarding the US Services PMI in March. The ISM services PMI is expected to remain resilient, slowing to 54.5 from 55.1. February’s Services PMI report had shown that services gained ground against the manufacturing PMI that contracted for the fourth month in a row.

The S&P Global US Services PMI published last week showed a much bigger than expected improvement, a result that could imply inflation won’t drop in line with expectations this month.

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