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What does a 50 basis-point rate hike mean for the New Zealand dollar?

New Zealand dollar

The New Zealand Reserve Bank has raised the official cash rate (OCR) by 50 basis-points, to 1.50%, to curb surging domestic inflation, in the largest rate hike in 22 years. The RBNZ is the first central bank among the developed countries to opt for a half-percentage rate hike, bringing its benchmark cash rate ahead of all the other major banks. It's the RBNZ's fourth rate rise in a row.

The New Zealand dollar surged initially on the announcement but cut gains in the subsequent trading hour as the monetary policy statement says, “a larger move now also provides more policy flexibility ahead in light of the highly uncertain global economic environment”, indicating that rate-hikes might not sustain. The NZD/USD spiked 50 points to 0.69 before falling to 0.6846 at 3.40pm (local time). The NZD/AUD was also up 50 points to 0.9230 before dropping to 0.9177 during the same timeframe.

Two factors contribute to strong local currency

In the medium term, the New Zealand dollar may stay strong against other peers amid an ongoing hawkish stance from the central bank, along with record-high dairy and meat export prices.

Firstly, New Zealand inflation hit a 32-year high at 5.9% annually in the final quarter of 2021. It is expected to be higher in the first quarter due to the Ukraine war-induced energy price spike, and worsened disruptions to the supply chain. The inflationary pressure will keep the RBNZ moving more aggressively to neutralise the OCR as indicated in today’s policy statement. 

Source: Stats NZ

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Secondly, strengthening commodity prices will keep the local currencies gaining. The farmgate prices for both dairy and meats are at record highs due to resource constraints such as lands, labouring, and less cash liquidity. According to Westpac’s forecast, the farmgate milk price for 2021/2022 is $9.60/kg, and the farmgate lamb price is $10.00/kg. The decreasing supply and rising demands will keep export prices at a record high, leading to a strong New Zealand dollar. 

Source: Global Dairy Trade

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Risks remain

New Zealand’s economy was hit by the omicron outbreak since December last year. Business confidence dived to a record low at -51.8 in February and recovered marginally to -41.9 in March. Credit card spending weakened at the same time, suggesting consumer confidence was dented due to the health restrictions and spiking consumer prices.

Local housing prices are cooling amid rising building costs and tightening monetary policy. A slow recovery is expected in the second half of the year, with the country moving to orange light and border reopening. However, geopolitical uncertainty remains with the Russia-Ukraine war ongoing.

US bond yields curves briefly inverted early in the month, flashing a recession signal. An ongoing strengthening US dollar is expected as the US Federal Reserve may also raise the interest by 50 basis-points in early May, which may press on the NZ dollar.

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