New Zealand Dollar Whipped by Jumbo Rate Hike. Will NZD/USD Rally Continue?

The New Zealand Dollar eventually skipped higher after the Reserve Bank of New Zealand (RBNZ) raised the official cash rate (OCR) target by 75 basis points (bp) to 4.25% from 3.50%.

The initial price reaction was quite erratic before the Kiwi found higher ground as it moved above 0.6190. A move above the recent peak of 0.6206 would make a new three month high.

The jumbo hike was mostly anticipated, with the overnight index swaps (OIS) market pricing in 66 bp prior to the decision. Most economist surveyed by Bloomberg forecast a 75 bp increase, although a minority were expecting 50 bp.

Prior to today’s decision, the RBNZ had raised their official cash rate by 50 bp at five consecutive meetings before this acceleration to 75 bp. This is the first change of this magnitude since the OCR inflation targeting regime was introduced in the 1999.

NZ Inflation is currently running at 7.2% year-on-year to the end of the third quarter. The bank has an inflation target band of 1-3%.

It would seem that the picking up of steam in price pressures pushed the RBNZ to their jumbo hike, after 3Q quarter-on-quarter inflation came in a 2.2%

Additionally, a tight labour market is showing the jobs market being above the RBNZ’s own measure of maximum sustainable level of employment. The unemployment rate remains near multi-generational lows at 3.3%.

The RBNZ said, “Core consumer price inflation is too high, employment is beyond its maximum sustainable level, and near-term inflation expectations have risen.”

With all the heat in the economy, a potential trigger for the outsized hike could be the fact that the RBNZ will not be meeting again for three months, on the 22nd of February 2023.

Of course, the Kiwi Dollar remains susceptible to external factors, not least has been the US Dollar of late with the Federal Reserve on their own inflation fight. The Fed have hiked by 75 bp three times and are anticipated by to lift by 50 bp at their December meeting.

After today’s meeting, the OIS market is now pricing the OCR to be near 6% in August next year, while the Fed is priced to be around 5% for their target rate.



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