New Zealand dollar slips, bonds rally as RBNZ hikes cautiously

[SYDNEY] The New Zealand dollar slipped on Wednesday and bond markets rallied after the country's central bank hiked rates by less than hawks had wagered on, though it also lifted forecasts for how far rates would ultimately have to rise.

The kiwi dollar eased to US$0.6917, from US$0.6943, and was testing support around US$0.6910/15. A break below would likely see a retreat to the September trough of US$0.6860.

The Australian dollar was caught in the downdraught and dipped to US$0.7217, threatening support under US$0.7207.

The Reserve Bank of New Zealand (RBNZ) met most analysts expectations by raising its cash rate 25 basis points to 0.75 per cent, but speculators had been long of the kiwi in hopes of a bigger move to 1.0 per cent.

Minutes of the meeting showed the central bank's committee considered a faster pace of hikes, but chose to be cautious given the continuing pandemic and the very high levels of household debt.

"The standard move is consistent with the RBNZ's already signalled measured approach to policy tightening, and it is already ahead of most central banks withdrawing policy stimulus," said Kiwibank chief economist Jarrod Kerr.

That helped bonds rally and two-year swap rates fell 17 basis points to 2.2150 per cent. Yields on 10-year bonds dropped 10 basis points to 2.495 per cent.

The RBNZ also revised up the forecast path for rates in the future, seeing it at 1.5 per cent by June compared to a previous call of 1.2 per cent. Rates were seen peaking around 2.6 per cent by the end of 2023, which would be some way above the RBNZ's estimated neutral rate of 2.0 per cent and an outright restrictive stance.

"The new rate track has pulled forward expected hikes and lifted the end point to 2.6 per cent," said Kerr. "We now expect the cash rate to hit 2.5 per cent in 2023, up from 2 per cent previously."

That is in marked contrast to the Reserve Bank of Australia (RBA) which has said any hike in its 0.1 per cent cash rate was extremely unlikely next year.

The market is wagering it will have to move much earlier and have 0.25 per cent priced in by June, with rates near 1.0 per cent by year end.

Domestic data out on Wednesday were fairly upbeat with construction spending dipping by only 0.3 per cent in the third quarter, when analysts had looked for a drop of 3.1 per cent.

That suggests figures for gross domestic product due next week might be a little less dire than feared, though they are still likely to show a sharp contraction given the lockdowns that shut Sydney and Melbourne.

REUTERS