The Reserve Bank of New Zealand Raised Rates, but Signaled the End of its Hike Cycle

  • NZDUSD
    (${instrument.percentChange}%)

Another Rate Increase

The Reserve Bank of New Zealand had raised rates by another outsized 0.5% in its previous meeting in April, against market expectations for a smaller move, but the uncharacteristically vague guidance had created some uncertainty around the rate path. [1]

Today, policymakers opted for a smaller 25 basis points increase that brought the official cash rate to 5.5% and the highest since 2008. The decision itself definitely did not constitute a surprise, even though two members dissented in favor of a pause (out of seven). [2]

The End of Hikes

This time around, the bombshell came not from the size of the move, but from the bank's projections around the appropriate policy path. The Monetary Policy Statement reveals that the current OCR of 5.5% is expected to be the terminal rate, while rate cuts are likely to follow from second half of the next year, since the official cash rate is projected to fall to 5.3% by the end of 2024. [3]

This marks a watershed for the Reserve Bank of New Zealand, which has been at the forefront of monetary tightening and highlights the uncertainty around central banks, which appear to be all over the place. The RBNZ was the first major central bank to increase rates all the way back in October 2023, having delivered twelve consecutive hikes worth 525 basis points, in its most aggressive cycle since 1999 when the OCR was introduced.

Easing Inflation

Policymakers adopted this aggressive tightening approach in order to bring down surging inflation, which had risen up to 7.3% y/y in Q2 2022 and the highest level in three decades. Since then, CPI has shown some moderation, printing 6.7% y/y in the first quarter of 2023 – the smallest increase in over a year.

The policy committee believes that inflation has peaked and that it will continue to decline moving forward, as the level of interest rates is "constraining spending and inflation pressure". It also expressed confidence that inflation will return to the 1-3% target, by maintaining rates at restrictive level for some time. [2]

Trade the News: View our Economic Calendar

Overly Optimistic?

Despite this confidence, policy makers don't expect the Consumer Price Index to fall back within the 1-3% range before the back-half of 2024. More to it, the labour market is still very tight, with unemployment close to its historic lows and elevated wages. The Labor Cost Index (LCI) rose 4.3% y/y in Q1, which is the biggest increase since the data started in 1992. [4]

The above data make one wonder whether the RBNZ is overly optimistic that it will be able to tame inflation, without having to raise interest rates past their current level.

NZD/USD Reaction

The RBNZ pointed to the end of its aggressive rate hike cycle, since officials view the current rate as the peak, against market expectations for more tightening. This sparked a sharp decline of NZD/USD.

Nikos Tzabouras

Senior Financial Editorial Writer

Nikos Tzabouras is a graduate of the Department of International & European Economic Studies at the Athens University of Economics and Business. He has a long time presence at FXCM, as he joined the company in 2011. He has served from multiple positions, but specializes in financial market analysis and commentary.

With his educational background in international relations, he emphasizes not only on Technical Analysis but also in Fundamental Analysis and Geopolitics – which have been having increasing impact on financial markets. He has longtime experience in market analysis and as a host of educational trading courses via online and in-person sessions and conferences.

References

1

Retrieved 23 May 2023 https://www.rbnz.govt.nz/hub/news/2023/04/official-cash-rate-increased-to-5-25-percent

2

Retrieved 23 May 2023 https://www.rbnz.govt.nz/hub/news/2023/05/official-cash-rate-set-to-remain-restrictive

3

Retrieved 23 May 2023 https://www.rbnz.govt.nz/hub/-/media/project/sites/rbnz/files/publications/monetary-policy-statements/2023/05/mpsmay23.pdf

4

Retrieved 14 Apr 2024 https://www.rbnz.govt.nz/hub/-/media/project/sites/rbnz/files/publications/monetary-policy-statements/2023/mpsfeb23.pdf

${getInstrumentData.name} / ${getInstrumentData.ticker} /

Exchange: ${getInstrumentData.exchange}

${getInstrumentData.bid} ${getInstrumentData.divCcy} ${getInstrumentData.priceChange} (${getInstrumentData.percentChange}%) ${getInstrumentData.priceChange} (${getInstrumentData.percentChange}%)

${getInstrumentData.oneYearLow} 52/wk Range ${getInstrumentData.oneYearHigh}
Disclosure

Any opinions, news, research, analyses, prices, other information, or links to third-party sites contained on this website are provided on an "as-is" basis, as general market commentary and do not constitute investment advice. The market commentary has not been prepared in accordance with legal requirements designed to promote the independence of investment research, and it is therefore not subject to any prohibition on dealing ahead of dissemination. Although this commentary is not produced by an independent source, FXCM takes all sufficient steps to eliminate or prevent any conflicts of interests arising out of the production and dissemination of this communication. The employees of FXCM commit to acting in the clients' best interests and represent their views without misleading, deceiving, or otherwise impairing the clients' ability to make informed investment decisions. For more information about the FXCM's internal organizational and administrative arrangements for the prevention of conflicts, please refer to the Firms' Managing Conflicts Policy. Please ensure that you read and understand our Full Disclaimer and Liability provision concerning the foregoing Information, which can be accessed here.

Past Performance: Past Performance is not an indicator of future results.

Spreads Widget: When static spreads are displayed, the figures reflect a time-stamped snapshot as of when the market closes. Spreads are variable and are subject to delay. Single Share prices are subject to a 15 minute delay. The spread figures are for informational purposes only. FXCM is not liable for errors, omissions or delays, or for actions relying on this information.