The Reserve Bank of New Zealand Hiked Rates Again, Reasserting its Hawkishness

One Year of Hikes

The Reserve Bank of New Zealand was the first major central bank to raise interest rates, having started exactly one year ago (on October 2021), beating the Bank of England, whose lift-off came two months later.

Today, it increased rates by 50 basis points, adjusting the Official Cash Rate to 3.5% ^[1] and the highest level since April 2015. This was the eighth straight move of this size and the eight consecutive hike overall.

The bank is running its most aggressive tightening cycle since the OCR was introduced in 1999, having produced 325 basis points worth of hikes since last year's lift-off.

Hawkish Stance

Given the elevated interest rates and the adverse impact they typically have on the economy and its lagging nature, it would not be unreasonable for officials to soften-up their stance. Only a day earlier, their Australian peers had done so, as the RBA raised rates by only 0.25%, slowing the pace of its tightening cycle.

RBNZ policy makers however, not only didn't show any signs of stepping back, but they actually discussed the possibility of an even bigger 75 bps move, as the minutes of the meeting showed. Furthermore, they deemed appropriate "to continue to tighten monetary conditions at pace".

Back in August, the central bank had upgraded its forecasts for the Official Cash Rate (OCR), expecting it to peak at 4.1% next year and remain at this level well in 2023 ^[2], which implies hikes of 50-75 bps. The central bank has one more policy meeting within the current year and the first of 2023 is expected in February.

High Inflation & Resilient Economy

Surging Inflation probably did not leave much room for a slowdown, since the Consumer Price Index (CPI) had climbed to 7.3% (year-over-year) in the second quarter and the highest level in thirty-two years. Back in the August projections, the bank viewed this as peak, but in any case, it expects it to remain elevated over the next year.

The committee today commented on the depreciations of the Kiwi, noting that if sustained it would pose "further upside risk to inflation over the forecast horizon".

In regards to the labour market, the Committee judged that it "remains very tight", with the Unemployment Rate at 3.3% at the second quarter, marginally up from the 3.2% record low. The RBNZ's however raised its projections and sees it beyond 4% in 2023 and at 5% in 2025.

Officials also acknowledged the recent rebound in the Gross Domestic Product which grew by healthy 1.7% in Q2 (quarter-over-quarter), after the 0.2% contraction of the first quarter, but the bank expects very low growth rates over the next several quarters.

Overall, the economy has shown resilience, allowing the central bank to pursuit its aggressive monetary tightening, but the first warning signs are here and remains to be seen when it will find it appropriate to slowdown.

NZD/USD Reaction

The pair had dropped to its lowest level since April 2020 last week, which was the seventh straight losing one, due to risk aversion and the US Dollar's dominance. The greenback has deflated since, allowing NZD/USD to find some reprieve.

Today's hawkish decision by the RBNZ, send the pair higher initially. However, the move was contained by the 38.2% Fibonacci of the September high/low drop and the gains were quickly erased.