The Reserve Bank of New Zealand Surprised Markets with Another Outsized Hike

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RBNZ Stayed the Course

The Reserve bank of New Zealand had not shown any inclination to back down from its aggressive tightening cycle and today it delivered another sizeable rate hike of 50 basis points. This was the eleventh straight increase that brought the official cash rate to 5.25% and the highest level since late-2008. [1]

The size of the move surprised markets, as baseline expectations were for a smaller 0.25% increase. The minutes showed that policymakers did consider this option, but decided to go with 50 bps, which was regarded as the best choice.

The recent banking turmoil seems to not have not affected New Zealand, since the RBNZ determined that financial conditions "have not tightened substantially" and sees "no material conflict" between the pursuit of lower inflation and ensuring the stability of the financial system,

High Inflation & Strong Labour

The latest available data showed that Headline Consumer Price Index steadied at 7.2% y/y in the fourth quarter, close to its three-decades high. Unemployment may have ticked up to 3.4%, but it was the highest since Q1 2021 and close to historical lows. More to it, the labor cost index posted its biggest annual increase since the data started in 1992.

The above indicators probably did not leave much room to the central bank for a moderation of its uber-hawkish policy stance. Officials acknowledged that, noting that inflation is "still too high" and employment is "beyond its maximum sustainable level.

Closer to the End?

Economic activity has taken a hit from the aggressive tightening cycle, which has produced 500 basis points worth of hikes, since the October 2021 lift-off. GDP contracted by 0.6% q/q in the fourth quarter, which was the worst performance in nearly two years and much lower than the RBNZ anticipated. This slowdown could contain the RBNZ moving forward.

Despite today's hawkish hike, the Committee did not offer clarity around its next moves, only saying that the official cash rate needs to be at a level that "will reduce inflation and inflation expectations". This wording is clearly more dovish than the "monetary conditions need to tighten further" reference of the previous statement. [2]

This softening shows the central bank may not have much more road ahead, but it may also be early for a pause. As per February's Monetary Policy Statement (MPC), officials expect a terminal rate of 5.5%, which suggests 25 basis points worth of hikes. [3]

RBNZ-RBA Differential

The aggressive hike by the Reserve Bank of New Zealand not only surprised markets, but was also in stark contrast with the policy decision by its Australian counterpart a day earlier. The Reserve Bank of Australia hit pause on Tueasday, after ten consecutive rate hikes. [4]

However, the RBA did not shut the door to more tightening and Governor Lowe clarified today that the decision to hold rates "does not imply" that increases are over. [5]

NZD Reaction

The Kiwi was boosted after the surprise move by the central bank of New Zealand and the differential with the RBA, sends AUD/NZD to new 2023 lows. NZD/USD meanwhile extends its weekly gains as the Fed recently moved to a more conservative stance, whereas the RBNZ stayed the course.

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

2

Retrieved 04 Apr 2023 https://www.rbnz.govt.nz/hub/news/2023/02/reserve-bank-increases-the-official-cash-rate

3

Retrieved 04 Apr 2023 https://www.rbnz.govt.nz/hub/-/media/project/sites/rbnz/files/publications/monetary-policy-statements/2023/mpsfeb23.pdf

4

Retrieved 04 Apr 2023 https://www.rba.gov.au/media-releases/2023/mr-23-08.html

5

Retrieved 16 Jul 2024 https://www.abc.net.au/news/2023-04-05/philip-lowe-rba-governor-interest-rate-speech/102188510

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