RBNZ Hike By Just .25%
The RBNZ meeting overnight proved to be a lacklustre event for Kiwi bulls. Ahead of the meeting expectations had been running high. The market had fully priced in a 0.25% rate hike with additional pricing reflecting a 40% probability of a .5% rate hike. However, there were no fireworks this time around with the RBNZ delivering a rate hike of just .25%, as expected, leading to short term unwinding as the market reacted with disappointment.
OCR Projections Upgraded
While the decision itself was no doubt disappointing to those looking for a more aggressive move from the RBNZ, there were some hawkish highlights to offer optimism in the near term. The RBNZ upgraded its OCR projections, now forecasting the headline OCR rate to hit 2% by end 2022 and 2.5% by end 2023. With these fresh projections, the OCR is now forecast to hit the bank’s neutral level a year earlier than previously forecasted.
In explaining the decision to raise by just .25% this time around, RBNZ governor Orr noted that, while the bank had indeed considered a .5% hike, ultimately it decided to stick with a slow and steady pace of tightening. The high levels of household debt as well as the economic impact of recent lockdowns on consumers and businesses alike, was judged to be too susceptible to the negative impact of a larger rate hike.
Upside Inflation Risks
However, the RBNZ did note its concerns around inflation, namely that inflation expectations become unanchored from its inflation target. With New Zealand’s borders not opening until the new year, there is still plenty of time for inflation to surge higher still, creating further difficulty for the RBNZ. With this in mind, risks appear skewed to the upside for New Zealand Dollar in the near term. While this month’s meeting proved disappointing for bulls, continued data strength will be met by a stronger Kiwi as traders anticipate a faster pace of tightening from the RBNZ.
For now, the market continues to correct lower within the bear channel which has framed the decline from recent highs. Price is currently held up at the 79.19 level support and while above here, the focus is on an eventual break higher and continuation of the broader bull trend.