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Rate hikes cannot save the weak Kiwi dollar

The Reserve Bank of New Zealand (RBNZ) increased the Official Cash Rate (OCR) by 25 basis points to 0.75% today. It is the second time this year the Reserve Bank has raised the cash rate. The Bank made its first rate hike in seven years in October. However, the Kiwi dollar was not boosted by the rising rates, as the odds were in favor of a 50 basis points increase in the backdrop of burning inflation and a tightened labor market condition.

It was widely expected that the Reserve Bank would tighten its stimulus monetary plan more aggressively and the move is being seen as taking action on interest increases too slowly. The New Zealand third-quarter consumer price index (CPI) rose by 4.9% from a year ago, the highest since December 2010. Meanwhile, the unemployment rate fell to 3.4% in the third quarter, the lowest since 2008.

However, the Delta outbreak since August is restraining the economic growth as the containment measures are still in place despite health restrictions easing.

“Household spending and business investment will be dampened in the near-term by these ongoing health uncertainties,” the RBNZ said in the statement released today.

Economists at Westpac bank expect that the NZ GDP will fall 6% in the third quarter due to the impact of the delta outbreak.

The New Zealand economy is experiencing the same issues as the other major countries globally. The supply-chain disruption and high consumer demands are causing ongoing inflation pressure. RBNZ sees “the headline CPI will remain above 5% in the near term before it drops to towards 2% midpoint in the next two years”.    

The New Zealand dollar fell 30 points against the USD to a low of 0.6915, before the pair bounced back to 0.6928 at local time 2:33 pm on the news. The NZD weakened 34 points against its counter-party AUD to a low of 0.9578, before the pair bounced back to 0.9595 at the same time.



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