New Zealand dollar rallies as RBNZ raises rates, signals more hikes

SYDNEY: The New Zealand dollar bounced on Wednesday after the country’s central bank lifted interest rates for the first time since mid-2023 and said further increases were likely, with the pace of future moves dependent on incoming economic data.

The Reserve Bank of New Zealand raised its official cash rate 25 basis points to 2.50%, citing that while further increases “appear likely at upcoming meetings, their timing is highly uncertain.”

Two of the RBNZ’s six committee members judged the risks to inflation to be on the upside, while the rest saw them as balanced, including Governor Anna Breman.

“With the monetary policy stance still very loose, members judged that it would appropriate to start withdrawing policy accommodation,” noted Abhijit Surya, a senior APAC economist at Capital Economics.

“The cautious approach sits well with our view that the bank will raise rates at roughly every other meeting going forward, until the OCR peaks at 3.25%.”

Investors had wagered heavily on a hike given hawkish guidance from policy makers and the current low level of rates.

Markets now imply a 60% chance of a further move at the next policy meeting in September, and around 38 basis points of tightening by the year-end.

The kiwi dollar firmed 0.4% to $0.5699, having slipped 0.3% overnight when hostilities between the United States and Iran lifted oil prices.

The kiwi faces resistance at $0.5726, with support around $0.5627.

Two-year swap rates were up 4 basis points at 3.3711%, while 10-year bond yields added 9 basis points to 4.543%.

Yields climbed overnight in line with a spike in the US bond market, yet they were still 1 basis point under Treasuries having outperformed for most of the past three months.

The Aussie dollar edged 0.1% higher to $0.6938, after also losing 0.4% overnight.

Support stands at the recent three-month low of $0.6866, while a band of resistance lies at $0.6980/0.7000.

The Reserve Bank of Australia will meet in August and is considered unlikely to raise rates again given oil prices were still down sharply from the last hike in May.

Markets imply a 60% chance of one final increase in the 4.35% cash rate, though that probability shifts with oil prices. Speaking on Wednesday, the RBA’s chief economist noted there were few signs of a marked slowdown in the local economy, despite gloomy readings on consumer and business confidence.