New Zealand dollar climbs as hot inflation fuels rate flames

SYDNEY: The New Zealand dollar jumped on Friday after a red-hot inflation reading fuelled speculation that interest rates could rise as early as next month, scorching the bond market.

The kiwi added 0.3% to $0.7004, having briefly been as high as $0.7050 in reaction to shockingly strong inflation figures for the second quarter.

The consumer prices index jumped 1.3% in the quarter to lift annual inflation to 3.3%, from 1.5% in the first quarter. Both were the highest in a decade and well above market forecasts.

Analysts noted the high annual reading was exaggerated by comparison to last year when a coronavirus lockdown and government relief measures sent prices lower. Supply bottlenecks and the closure of international borders added to the upward pressure.

Yet price rises in the June quarter were also broad-based, led by big gains in home building costs, food and petrol.

The Reserve Bank of New Zealand (RBNZ) had already turned more hawkish by announcing the end of its bond buying campaign, and markets were now pricing an 86% chance of a quarter-point rate hike to 0.5% in August.

New Zealand dollar buoyed by yield surge, Aussie lags behind

"Inflation is accelerating and is now through the top of the RBNZ's 1-3% inflation target band," said Jarrod Kerr, chief economist at Kiwibank. "We have seen a quantum shift in expectations and businesses are less worried about demand and more worried about supply."

"We now expect the RBNZ to lift the cash rate in August, in what will be the first of at least three hikes from here."

Such a move would make the RBNZ among the first central banks in the developed world to start on the long path to normalising policy, giving the kiwi an ever-wider yield advantage.

The two-year swap rate surged 10 basis points to 1.095% on the data, the highest since February last year when the emergence of the pandemic led to massive policy easing across the globe.

This was all in stark contrast to the Reserve Bank of Australia (RBA), which only recently reiterated that it was unlikely to raise rates until 2024.

That dovish tilt kept the Aussie down at $0.7423, and a whisker away from a seven-month low of $0.7410, having shed 0.9% for the week so far.

The Aussie also slid to a near-six month low on the kiwi at NZ$1.0579, again down 0.9% for the week.