Wednesday morning, the Reserve Bank of New Zealand will meet for its last monetary policy meeting of the year. It will also be the last meeting chaired by acting Governor Christian Hawkesby before Anna Breman takes over as Governor next week, Commerzbank's FX analyst Volkmar Baur notes.

Markets expect cut, but inflation may hold RBNZ back

"The market is fully pricing in a 25 basis point rate cut, and most economists surveyed by Bloomberg agree that the central bank will lower interest rates again. However, I would be a little more cautious. Inflation in New Zealand is still at the upper end of the central bank's tolerance band of 2-3% and has tended to rise in recent quarters. In the third quarter, for example, annualised inflation was still at 4%."

"At the same time, the New Zealand dollar is the weakest of all G10 currencies alongside the US dollar and has lost around 11% against the euro since the beginning of the year. Since last summer, the RBNZ has already cut interest rates by a total of 300 basis points, 50 of which were cut during the last meeting in October. The full effects of the interest rate cuts are therefore unlikely to have been felt in the economy yet. However, rising sentiment indicators and higher expectations of rising prices point to a slight improvement."

"I therefore see little reason for another cut so soon and would rather expect a pause in the cycle of interest rate cuts. As already mentioned, however, the market and most economists see things differently, so a cut tomorrow would come as no surprise and should therefore not weigh too heavily on the Kiwi."