NZ dollar skids as RBNZ flags gradual hikes, Aussie supported

SYDNEY: The New Zealand dollar slid on Wednesday after the country’s central bank raised interest rates as expected but projected a more gradual and limited pace of further tightening than markets had wagered on.

In contrast, the Australian dollar held steady after data showed the economy held up better than expected in the second quarter, narrowing the odds on another hike in rates there.

At the same time, bond yields in both countries were swept up in a global selloff as fresh fighting in the Gulf lifted oil prices and stoked concerns about inflation.

The Reserve Bank of New Zealand lifted its official cash rate by 25 basis points to 2.75% and flagged further tightening was likely, but emphasised that would be gradual and it saw significant downside risks to the economy.

As a result, it projected rates at 2.81% by December and 3.15% at the end of 2027, barely higher than the previous forecast in May.

Markets had priced in a faster pace of moves and a top around 3.5%.

“Markets expected maybe a higher track and the market pricing was well above the track anyway,” said Westpac’s New Zealand strategist Imre Speizer.

“I’d wrap it up as a slightly dovish hike,” he added. “Our arithmetic implies no-go in October, but a December hike.”

The swaps market reacted by nudging 2-year rates down 3 basis points to 3.7001%, even as longer-term yields climbed to five-month highs.

The kiwi dollar slid 0.7% to $0.5893, on top of a 0.4% drop overnight. Support lies at $0.5821, with resistance up at $0.5988.

The Aussie held at $0.7143, having eased 0.3% overnight. Support comes in around $0.7135 and $0.7067, with resistance at the recent 15-week top of $0.7208.

It also climbed 0.7% on the kiwi to NZ$1.2199.

Australian data showed the economy grew 0.4% in the second quarter to just pip forecasts of 0.3%, largely thanks to a consumer splurge on electric vehicles as petrol prices jumped.

Annual growth slowed to 2.1%, from 2.5%, but was some way above forecasts of 1.8% and higher than what the Reserve Bank of Australia considers the speed limit for the economy.

That will not be welcome news for policymakers since they lifted rates three times this year to 4.35% expressly to slow growth and curb inflation.

Investors reacted by nudging up the chance of a hike this month to 58%, from 49% before the data, while a move to 4.60% is fully priced for November.

Bond investors seemed convinced a further tightening would be needed to chill inflation as they pushed 10-year yields to highs not seen since mid-2011 at 5.161%.