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

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

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

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%. Yields on 10-year bonds dropped 10 basis points to 2.495%.

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

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

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

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

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

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.