New Zealand dollar climbs as central bank hikes, predicts a lot more to come

THE New Zealand dollar climbed on Wednesday after the country’s central bank raised interest rates by half a point and sharply lifted its projection for future hikes, sending bond yields surging. In a hyper-hawkish statement, the Reserve Bank of New Zealand (RBNZ) raised its official cash rate (OCR) by 50 basis points to 2.0 per cent and projected it would reach 3.4 per cent by the end of the year, a seismic shift from the previous projection of 2.2 per cent. There are only four policy meetings left this year to reach 3.4 per cent, implying at least two more moves of 50 basis points. The bank also projected a peak for rates at 3.95 per cent by September next year, compared with the previous forecast of a top of 3.4 per cent in September 2024. “The Committee agreed to continue to lift the OCR at pace to a level that will confidently bring consumer price inflation to within the target range,” RBNZ Governor Adrian Orr said. “Once aggregate supply and demand are more in balance, the OCR can then return to a lower, more neutral, level,” he added, projecting rates will ease to 3.5 per cent by mid-2025. The kiwi dollar climbed 0.4 per cent to US$0.6485, but ran into profit-taking near resistance at US$0.6500. The next target is US$0.6568. The Australian dollar initially firmed on the move but ran into selling against the kiwi which pulled it down to NZ$1.0937, from an early top of NZ$1.1031. That left the Aussie off 0.3 per cent on the US dollar at US$0.7090, having stalled short of resistance at US$0.7126. New Zealand two-year swap rates jumped to 3.64 per cent, from an early low of 3.45 per cent, while 10-year bond yields rose 12 basis points to 3.55 per cent. Markets shifted to imply a cash rate around 2.41 per cent for July and 3.5 per cent by year end, up from 3.23 per cent before the statement. “The Bank’s hawkish tone and more aggressive rate hike forecasts suggest that our own aggressive forecasts are now too dovish,” said Ben Udy, an economist at Capital Economics. “We’re lifting our forecasts for the Bank’s next two meetings to 50 bp rate hikes, which along with 25 bp hikes in the last two meetings of the year would bring rates to 3.5 per cent by the end of the year.”

He, however, thinks such a drastic tightening will tip the housing market into a downturn and the RBNZ will be cutting rates as early as the second half of 2023. REUTERS