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A short-term window for NZD gains has opened.
The New Zealand Dollar's midweek advance showed markets underestimated the RBNZ's resolve to keep a lid on inflation, and further gains are possible in the coming days.
The Reserve Bank of New Zealand raised interest rates 25 basis points to 2.50% while hinting that it can raise the OCR further in the coming months.
The New Zealand dollar rose in response, which is a clear signal that the market was 1) not fully priced for a hike today and 2) the messaging was more 'hawkish' in nature than was expected.
In short, this is a central bank that thinks it needs to raise rates to defend against inflation, and that, for now at least, associated risks to the economy from such moves are of secondary importance.
The statement said further hikes "appear likely at upcoming meetings," which underpinned the market's expectations for the RBNZ to deliver at least one, maybe even two, more hikes by year-end.
"NZD’s post-hike rally looks more sustainable in the near term than we had anticipated," says Francesco Pesole, FX Strategist at ING Bank. "There is interest in preserving the market’s hawkish pricing."
The split of votes on the Committee was instructive, as there was no vote split that might have sent dovish signals, as the minutes said the Committee "reached consensus" to increase rates.
Ahead of the decision, we reported that money markets might be mispriced on the future for New Zealand interest rate developments, judging that too many hikes were expected.
Expectations for further hikes were contrary to evidence that energy-related inflation will fall sharply soon, and that the economy is simply not strong enough to drive the demand needed for a true inflationary uplift.
Nevertheless, the RBNZ is clearly intent on finding a higher equilibrium for interest rates in light of inflationary risks.
These developments can therefore underpin the Kiwi dollar in the short-term. Translated onto GBP/NZD, that looks like a pullback from the range resistance at ~2.35500 back towards 2.34.
Economists at Auckland-based bank ASB expect the RBNZ to deliver three more 25bps hikes this year, taking the OCR to a peak of 3.25%.
"The market is currently pricing only around 1.5 25bp hikes by year end. As a result a hawkish repricing of the OCR is a potential source of support for NZD/USD," says Kristina Clifton, FX analyst at Commonwealth Bank.
ASB's Chief Economist Nick Tuffley says the RBNZ will continue to lift the OCR steadily at the next remaining three meetings of this year, to a peak of 3.25%.
However, he acknowledges a risk to his default view is that the RBNZ pauses at some stage while it takes the OCR back to a more neutral level.
"As always, the speed of OCR increases is going to depend on what the data show, and also exactly how the Middle Eastern situation plays out over the coming months," says Tuffley.
