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NZD/USD Hits 7-week Highs as RBNZ Hikes Rates by 50 bps

NZD/USD Hits 7-week High as RBNZ Hikes Rates by 50 bps

The Reserve Bank of New Zealand made a surprising move by increasing the rate hike by 50 basis points instead of the expected quarter-point increase. Consequently, the NZD/USD rose sharply to $0.6380, its highest level in seven weeks.

RBNZ Increases OCR to 5.25%

The Reserve Bank of New Zealand (RBNZ) increased the official cash rate by 50 basis points from 4.75% to 5.25%, bringing borrowing costs to 15-year highs.

Since October 2021, the central bank has increased the cash rate by a total of 500 basis points over 11 consecutive meetings.

RBNZ OCR Chart

NZD/USD,RBNZ Market Analysis

The board restated that consumer inflation remains too high and persistent, and that labor market is tight.

The Committee agreed the OCR needs to increase, as previously indicated, to return inflation to the 1-3 percent target range over the medium term. Inflation is still too high and persistent, and employment is beyond its maximum sustainable level.” RBNZ April Policy Statement.

The Committee agreed that the OCR needs to be at a level that will reduce inflation and inflation expectations to within the target range over the medium term. The Committee agreed that maintaining the current level of lending rates for households and businesses is necessary to achieve this, along with a rise in deposit rates.

Due to the global economic slowdown, reduced residential building activity, and the effects of the monetary policy tightening so far, the bank expects the domestic economic growth to slow during 2023.

NZD/USD Soars following RBNZ’s Decision

The unexpected 50 bps rate hike pushed the Kiwi higher against major rivals, and it is now the top performer against the greenback, with nearly 0.6% daily gains. 

NZD/USD,RBNZ Market Analysis

The NZD/USD pair instantly spiked to $0.6380 following the interest rate announcement, before retreating to 0.6344 at the time of writing. However, the pair is still hovering near its highest levels since Feb 15th. 

Meanwhile, the broad US Dollar weakness also supported the NZD/USD gains. The US Dollar Index (DXY) extended recent decline on Wednesday as softer data weighs on the US economic outlook. The greenback is trading below the 102 mark, heading south to its lowest levels since early February. 

The pair’s short-term rally is also buoyed by RBNZ/Fed policy divergence as markets prepare for a potential Fed pause in May, while expectations for rate cuts in H2 2023 are growing. 

On the US data front, USD traders will be watching ADP employment figures and ISM Services PMI later today. While all eyes will be on March Non-farm Payrolls (NFP) on Friday.

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