New Zealand Dollar Spikes on RBNZ Rate-Hike Warning

November 29, 2023 - Written by Ben Hughes

STORY LINK New Zealand Dollar Spikes on RBNZ Rate-Hike Warning

The Reserve Bank of New Zealand (RBNZ) held interest rates at 5.50% at the latest policy meeting which was in line with consensus forecasts.

The statement was, however, notably more hawkish than expected and the warning that interest rates may have to increase further trigger sharp New Zealand dollar gains.

NZD/USD spiked to 16-week highs above 0.6200 before a correction to 0.6155 with the soft US dollar also helping to underpin the kiwi.

The Pound to New Zealand dollar (GBP/NZD) exchange rate also dipped sharply to 7-week lows just below 2.0500 before a recovery to 2.0610.

According to the statement; "If inflationary pressures were to be stronger than anticipated, the OCR would likely need to increase further,"

It added; "Interest rates will need to remain at a restrictive level for a sustained period of time, so that consumer price inflation returns to target and to support maximum sustainable employment.”

The bank also warned that the risk to inflation is still to the upside and it was concerned over a creep higher in inflation expectations.

In this context, the bank also stated that interest rate hikes had been discussed at the meeting.

Peak interest-rate expectations edged higher and the two-year swap rates rose 12 basis points to 5.205%.

ANZ noted; “Technically, the RBNZ’s track implies a hike in the first half of 2024. That’s a long way from where the market is now (markets are still pricing in small odds of a cut by May), and as such, we do see some upside risk to rates.”

Orr also described talks with new Prime Minister Luxton as highly constructive.

On Wednesday, the government stated that legislation to restore the central bank’s single mandate to control inflation would be introduced within the first 100 days of the administration.

MUFG commented; “We suspect the level of hawkishness communicated today by the RBNZ is somewhat excessive and unlikely to be sustained in an environment of further declines in inflation on a global basis.”

Nevertheless, according to the bank; “The surprise tone from today’s RBNZ meeting leaves short NZD positioning vulnerable.”

It noted that leveraged Funds have recently increased short NZD positions with the latest data recording the largest short position for eight weeks.

It added; “Given the current poor USD sentiment, the RBNZ’s hawkish stance could see NZD advance further from here although NZD was already the 2nd best performing G10 currency this month before today’s gain.”

According to ING; “We are positive on NZD/USD into next year - largely on the turn in the US dollar story. But a more hawkish than expected RBNZ can't hurt either. Let's see whether NZD/USD has the legs to push onto resistance at 0.63 in early December.”

ANZ did warn not to overplay the outlook, especially as the narrative in markets has been for central banks not to raise rates further.

Nevertheless, it added; "But there does appear to be genuine concern that the bulk of the transmission of monetary policy is now in the rear-view mirror and core inflation and inflation expectations have not responded as hoped,"

It added that the rhetoric suggested; “the economy might be at risk of getting a second wind too soon, and that’s likely to put a floor under interest rates and the NZD.”

Commerzbank noted a shift in expectations; “the RBNZ’s MPC shifted its expectation of future key rate developments to the upside. Further rate hikes are possible now. Probably not very many, but still: that makes rate cuts as early as next year unlikely.”

It also expects the era of low inflation has ended which makes the RBNZ stance more credible than other central banks.”

It added; “And they will consider the initial market reaction to the RBNZ decision to be too limited rather than excessive.”

According to Commerzbank; “The notably more hawkish stance from the RBNZ compared with other central banks will tend to provide New Zealand dollar support.”

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TAGS: New Zealand Dollar Forecasts