The Reserve Bank of New Zealand increased the official cash rate (OCR) by 25 basis points and indicated it plans to increase the OCR by a larger scale if required in the coming quarters. The Committee also agreed to commence balance sheet reduction under the Large-Scale Asset Purchase (LSAP). The New Zealand dollar surged on the RBNZ’s hawkish stance.
It is the third time the Reserve Bank increased the cash rate since October last year. RBNZ is ahead of all the other major central banks on the pace of rate hikes, with the benchmark rate leading the global benchmark rates at 1 full percentage.
Major Currencies | NZD | GBP | CAD | USD | AUD | EUR | JPY | CHF |
Benchmark interest rate | 1.00% | 0.50% | 0.25% | <0.25% | 0.10% | 0.00% | -0.10% | -0.75% |
The NZD was up 0.5% against USD and strengthened 0.4% against the AUD in the first 20 minutes since the announcement. The NZ 2-year swap rate was trading above 2.5%, the highest seen since February 2016.
As a 25-basis points lift was widely expected, the RBNZ’s statement was more hawkish with an indication for a possible larger raise of the cash rate at coming meetings, with the aim being to rein in surging inflation. The New Zealand consumer price index recorded at 5.9% YoY for the third quarter, the highest in 30 years. It may go higher for the fourth quarter according to the survey by RBNZ early in February. Labour markets shortfall, supply chain disruption, and soaring fuel prices have added upward pressure on consumer prices.
Globally, the Ukraine crisis weighs on the US and EU markets, which presses on the USD and Eurodollar. The Reserve Bank of Australia is keeping a more conservative tone on rate hikes. All of the above reasons are favorable for an ongoing strengthening of the New Zealand dollar. However, risk factors remain. The US Federal Reserve will hold its policy meeting on March 15-16, a more aggressive move on tightening monetary policy is also expected amid a more flaring inflation pressure in the US.
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