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The Kiwi dollar faces upside pressure as RBNZ is set for an unprecedent 75 bps rate hike

The Reserve Banks of New Zealand is forecasted to raise its Official Cash Rate (OCR) by 75 basis points, bringing the interest rate to 4.25% later today after a fifth consecutive 50 bps rate hike since April, and a total of 8 times of increase since October 2021. The Reserve Bank has been holding its hawkish stance in contrast of some other major central banks, which have signaled to slow down in their rate hikes amid economic concerns. This could continue to put the upside pressure to the New Zealand dollar against the other G10 currencies, where the Kiwi dollar has rebounded 11.6% against the US dollar and 6.4% against the Australian dollar since October.

The reason why the RBNZ has been sticked to its aggressive rate hike is that the domestic inflation did not show signs of declining, which hit 7.2% in the third quarter at a 32-year high, well above the Reserve Bank’s forecast of 6.4%. And the unemployment rate staying at 3.3% in the September quarter, which is the close to a record low of 3.2% earlier this year, along with a record increase of 3.75 in wage growth during the same 3 months. The spiral effect in wage increase indicates that inflation may stay stubbornly high, which reinforces a 75-bps rate hike approach by the Reserve Bank, especially this will be the last policy meeting before its next decision in February next year.

It is expected the OCR will reach as high as 5% at a peak next year according to swaps data, which is much higher than the previously projected 4.5%. But his could also suggest that it may be a one-off 75 bps hike before it drops backs to a 50 bps in pace in February 2023. As household spending has already been weakened due to the hefty inflation and rapid interest increase. The New Zealand retail spending in the second quarter dropped 2.3% quarter by quarter, which is the sharpest decline since the second quarter of 2020. And according to the Reserve Bank, the debt servicing will rise to 20% of average household disposable income from the current 9%, implying pressure ahead of the consumer spending ahead.

Where is the NZD/USD trending to?

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