The Reserve Bank of New Zealand delivered the anticipated 50-bps hike, causing NZD to soar against the US Dollar and Australian Dollar.
The RBNZ has been facing supply-side constraints that might require further increased rate hikes. The traction gained by NZD after the RBNZ delivered a 50-bp rate hike brought the RBNZ’s official cash rate (OCR) to 3.5%, the highest interest rate since early 2015.
The immediate reaction of the NZD/USD saw the currency pair move higher as traders found relief after the dovish hike from the RBA earlier this week. The RBNZ gave a surprisingly hawkish statement:
“The Committee considered whether to increase the OCR by 50 or 75 basis points at this meeting. Some members highlighted that a larger increase in the OCR now would reduce the likelihood of a higher peak in the OCR being required.”
AUD/NZD was quite higher in early Asia-Pacific trading. However, prices took a downward turn, putting prices on track to slide for a third session. While risk reversals remain positive for AUD/NZD, indicating more demand for calls on currency futures, the same measure, while still negative, improved for NZD/USD leading up to today’s decision.
Supply-side constraints in the New Zealand economy force the state’s policymakers to raise rates into restrictive territory, sacrificing real economic growth. The RBNZ might need to see a significant weakening in the labor market before deviating from its rate-hiking course.