The New Zealand dollar (NZD) fell over 1% on Wednesday to its lowest levels in more than three weeks after RBNZ increased interest rates as widely anticipated.
On Wednesday, the Reserve Bank of New Zealand (RBNZ) raised OCR by 25bps, bringing cash rates to a 14-year high of 5.5%. Since mid-2021, the bank has increased rates by a total of 525 basis points, which has now brought the OCR to its highest level since 2008.
Although the RBNZ is aware that increasing interest rates has resulted in reduced spending and less inflation pressure, the bank sees that maintaining high rates for an extended period is necessary to ensure consumer price inflation stability within the 1%-3% target range.
Why the NZD plumbed after RBNZ Rate Hike?
The bank mentioned that due to persistent inflation, rates will remain higher, mentioning that tightening of monetary policy could negatively impact the local economic growth.
The RBNZ gave a warning that the rate-sensitive sectors were already facing reduced demand and spending, indicating that economic growth would slow down in the upcoming quarters.
The New Zealand economy is anticipated to be impacted by weak global economic growth, particularly in Australia and China, the country’s main trading partners.
Moreover, hinting at concluding its tightening cycle added further pressures on the Kiwi.
The central bank’s view is that the current borrowing costs have reached their peak and it’s likely that there will be cuts starting in the third quarter of 2024.
The New Zealand dollar decreased to 0.6121 following the decision on Wednesday. The RBNZ meeting minutes suggested that the bank considered pausing future rate increases in order to observe the effects of stricter monetary policies on the economy.
In the first quarter of 2023, the annual consumer inflation stood at 6.7%, which exceeds the target range of the bank by more than two times. However, it slowed down from its peak of 7% reached in Q4 2022.
In April, the RBNZ increased rates by 50 bps, which was more than anticipated. They explained that the reason for the hike was due to high inflationary pressure. However, the bank suggested that future rate increases would be based on the data.
The RBNZ has scaled down its monetary tightening pace as the previous increases are affecting the economy. The data has not been impressive in the past few months, and the predicted growth of the economy for this year has reduced significantly since April.
“The Committee discussed evidence that monetary conditions are having a contractionary effect on the economy. Members were confident that the interest rates faced by firms and households have constrained spending and investment for some time. This reflects the significant increase in the Official Cash Rate (OCR) that has occurred since late 2021. ” RBNZ May policy statement.
The board has projected a mild recession for Q2 and Q3 of this year, indicating a less severe economic slowdown.
Reserve Bank of New Zealand (RBNZ) Governor Adrian Orr said during the press conference that the bank intends to keep tight monetary policy for some time, referring that they are getting on top of inflation.
NZD/USD – Debt Ceiling and FOMC Meeting Minutes in focus
The pair is heading to 2% daily losses weighed by domestic outlook as well as stronger USD. The Kiwi is the worst performing major currency against the greenback for the day.
Despite the lack of progress in negotiations over raising the U.S. debt ceiling, the U.S. dollar remained close to its two-month high.
The US Dollar Index (DXY), is up 0.22% at 103.71, a 2-months peak.
The political parties are currently negotiating about increasing the US debt ceiling, but they are not making much progress and an agreement is unlikely to be done soon.
Late on Tuesday, President Joe Biden and House Speaker Kevin McCarthy held another round of talks, but there was little progress made. The risk of default, which was estimated in early June, is still looming.
The dollar has received further support from better than anticipated economic data and hawkish comments from Federal Reserve officials who are inclined towards raising interest rates, causing markets to reconsider previous predictions of rate cuts US later this year.
Investors will closely analyze the Fed’s May meeting minutes, which will be released later today, for any indications of when the central bank intends to halt its tightening cycle.