New Zealand Dollar Pares Gains After Interest Rate Hike

10/06/2022

1 minute read

2022.10.06 08:39

MarketPulse

started the day with gains but has reversed directions. The New Zealand dollar is trading at 0.5707, down 0.52%.

RBNZ raises rates by 0.50%

As expected, the Reserve Bank of New Zealand delivered a 0.50% hike, bringing the benchmark to 3.50%, its highest level since 2015. The RBNZ has now hiked rates at eight consecutive meetings and even discussed a super-size 0.75% increase at today’s meeting.

The RBNZ has been aggressive with its rate-tightening cycle, and there’s likely more to come. The rate statement noted that “core consumer inflation is too high” and the labour market remains tight, a signal that the central bank will continue to tighten until inflation has peaked. This means that the November meeting will likely bring a rate hike of 0.50% or 0.25%, depending on economic data and the inflation picture. hit 7.3% in Q2, up from 6.9 in Q1.

One of the dangers of a steep rate-tightening cycle is choking off economic growth and Moody’s rating agency said after today’s rate hike that a soft land was “increasingly unlikely”. The RBNZ might disagree, pointing to a 1.7% gain in GDP in Q2 and a robust labour market. The economy has proven strong enough to bear sharp rate hikes and Governor Orr is looking for a peak in inflation before easing up on rates.

September was a disaster for the New Zealand dollar, which plunged a staggering 8.5% and fell to its lowest level since March 2020. NZD/USD has rebounded 2.0% in October, but the currency faces significant headwinds. The escalating conflict in Ukraine, which has seen President Putin annex 15% of Ukrainian territory, and a hawkish Federal Reserve are likely to continue weighing on the New Zealand dollar in the short term.