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25.05.202208:15 Forex Analysis & Reviews: New Zealand has upped the ante again. What does this mean for the NZD/USD pair?

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Exchange Rates 25.05.2022 analysis

To curb high inflation, the New Zealand authorities decided to go all-in. The Reserve Bank of New Zealand raised the interest rate by 50 bps for the second consecutive meeting. And this is just the beginning of the hawkish path.

The RBNZ has stepped up the fight against high inflation by sharply raising the base rate. On Wednesday, the Monetary Policy Commission raised the indicator from 1.5% to 2%.

This is the first time since the introduction of the official monetary rate in 1999 that the RBNZ consistently raises the rate by half a percentage point at once.Recall that the last time the central bank increased the indicator by 50 bps at its April meeting.

The RBNZ began a cycle of tightening monetary policy back in October. Since then, it has raised the rate five times in a row. To date, it has risen by 175 bps and reached the highest level since the fall of 2016.

A sharp increase in rates is an attempt by the central bank to reduce high inflation expectations that have risen above the upper limit of the target range.

Amid disruptions in global supply chains caused by the Ukrainian crisis and the lockdown in China, inflation expectations in New Zealand have risen to 3.29% for two years. And 5-year expectations jumped to 2.42%.

As for the real picture, the inflation rate in the country is a record 7% in the current quarter. This is the highest value in 30 years.

The RBNZ predicts that price growth will slow down to 3% in the second half of 2023, but inflation will not be able to return to the midpoint of the target range of 2% until 2025.

A more significant and earlier increase in the interest rate reduces the risk that inflation will become stable, – the bank commented on the latest rate hike.

Now the RBNZ is at the forefront of the global trend, which boils down to the curtailment of the quantitative easing program introduced in the COVID-19 pandemic.

Perhaps it will be the first among its colleagues to return to a "neutral" position when monetary policy does not stimulate the economy.

At a meeting on Wednesday, officials of the central bank stressed that in the future they intend to adhere to the set pace of tightening in order to maintain price stability.

According to the latest forecasts of economists, the RBNZ may raise rates to at least 3.25% this year and to almost 4% in 2023. This is higher than previous estimates.

The hawkish tactics of the central bank should support the New Zealand currency in the medium term, which has suffered greatly from the strengthening of the US dollar in the past few weeks.

Immediately after the RBNZ announced another rate hike, the kiwi rate jumped by more than half a cent and reached a 3-week high of $ 0.65.

Exchange Rates 25.05.2022 analysis

This morning, the NZD/USD pair was trading 0.43% higher than the previous close. Its steady growth was also facilitated by the weakening of the greenback against the background of a decrease in the yield of US Treasury bonds.

The dollar index has retreated by 1.23% since the beginning of this week. So, on Wednesday night, it fell to the lowest level in a month at 101.64, while the yield of

US bonds also plunged to an almost monthly low of 2.718%.

The US dollar's decline and profitability is due to the fact that traders have already taken the Federal Reserve's plans to raise rates into account and do not expect more aggressive actions from the central bank.

In addition, the last comment by the President of the Federal Reserve Bank of Atlanta, Rafael Bostic, had a negative impact on both indicators.

Yesterday, the official said that a rapid increase in rates could lead to significant economic shocks, and urged his colleagues to act cautiously.

The risk of recession for the New Zealand economy is also very high. Raising rates too quickly leads to the fact that high borrowing costs put pressure on the housing market and reduce consumer spending.

According to the latest RBNZ forecast, the average annual economic growth in New Zealand will be at the level of 3.2% until March 2023. Then, over the next 12 months, it is expected to slow down to 1.3%.

It seems that the country will not be able to avoid a recession, even though the country's economy is supported by a strong labor market, a stable household situation and favorable terms of trade. Therefore, there is no need to talk about optimistic long-term prospects for the kiwi...

lena Ivannitskaya
Analytical expert of InstaForex
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