Pound Sterling Hits 2-Week Best vs New Zealand Dollar on Dovish RBNZ

February 28, 2024 - Written by David Woodsmith

STORY LINK Pound Sterling Hits 2-Week Best vs New Zealand Dollar on Dovish RBNZ

The New Zealand dollar slumped following the Reserve Bank of New Zealand (RBNZ) interest rate decision with rates held at 5.50%.

This was the consensus forecast, although a minority of banks had backed a rate hike and markets had priced in around a 23% chance of a hike.

The New Zealand dollar to US dollar (NZD/USD) exchange rate plunged to the 0.6100 level from near 0.6180 ahead of the decision.

The Pound to New Zealand dollar (GBP/NZD) exchange rate also jumped to 2-week highs at 2.0740.

ING still sees a strong case for buying the kiwi on dips; “We see NZD/USD breaking the 0.6500 mark in 3Q24.”

The Australian dollar also posted sharp losses after the RBNZ decision with expectations that the Australian central bank would also adopt a less hawkish policy stance.

Australia also reported that inflation was unchanged at 3.4% for January compared with expectations of an increase to 3.6%.

AUD/USD retreated to near 0.6500 from 0.6550 while GBP/AUD also posted 2-week highs near 1.9450.

There was a sharp adjustment in market expectations following the release with the chances of a May RBNZ rate hike sliding to around 6% from near 50% ahead of the meeting.

Two-year yields also moved sharply lower to 5.00% from close to 5.20%.

According to the RBNZ, interest rates need to remain at a restrictive level for a sustained period.

The committee overall remains confident that the current level of rates is restricting demand while the outlook for inflation is more balanced.

Nevertheless, it pointed to headline inflation being above the 1-3% target band, limiting the committee’s ability to tolerate upside inflation surprises.

The RBNZ discussed the global context and noted; "A more general risk to global growth is that central banks may need to keep policy interest rates at restrictive levels for longer than currently reflected by financial market pricing, to ensure that inflation targets are met."

The BRNZ lowered its projection of interest rates slightly with the cash rate seen at 5.47% in March 2025 compared with 5.56% previously.

ASB chief economist Nick Tuffley commented; “We think over coming months the hurdle for an OCR move in either direction remains high”.

Matt Simpson, senior market analyst at City Index added; "With a cash rate at 5.5%, the 10 basis points of wriggle room is simply there to remind us that they’ll hike if they need to but the bias is that they probably won’t."

ANZ chief economist Sharon Zollner who had backed a rate hike at this meeting shifted her guidance; "The evidence threshold for the RBNZ committee is clearly much higher than we appreciated, so we have reluctantly parked further hikes back in the risk basket, pushing cuts out to mid-2025."

According to MUFG there were still hawkish elements; “So this communication could be described as certainly a softening of a bias to tighten policy further rather than a complete removal of that bias and certainly a strong message that the current stance will be required “for a sustained period of time.”

It added; “we remain a distance from pivoting to rate cuts and hence should mean a sustained slide in NZD from here is avoided.”

ING noted the sharp kiwi decline; “This is probably due to some unwinding of recently growing net-long positions on NZD and the fact that some investors were still expecting a rate hike this week.

The bank does not expect sustained New Zealand dollar weakness; “Our view in the medium term for New Zealand and NZD is – however – unchanged, given the content of this meeting and that new forecasts were in line with what was discussed in our latest NZD notes. NZD is due to benefit from an attractive carry for longer thanks to a more problematic disinflation path.

Commerzbank was more downbeat; “the forecasts are pointing to a weaker economy, but not an all-clear for inflation. Practically stagflation fears in their purest form. No wonder the Kiwi is under so much pressure today.”

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TAGS: Pound New Zealand Dollar Forecasts