25.05.202211:24 Forex Analysis & Reviews: New Zealand's Reserve Bank lifts rates to 2%

The kiwi soared versus the dollar as New Zealand's central bank raised interest rates by 0.50% to tame persistent inflation. Notably, regulators across the world announce rate hikes as all the responsibility for high prices is now on their shoulders. The only way out of the current situation is monetary policy tightening.

The Bank of England and the Reserve Bank of New Zealand followed the Fed's suit and announced a 50 basis-point increase in interest rates. Moreover, further aggressive moves are expected in order to curb raging inflation. The rate was raised by half a percentage point to 2% on Wednesday, in line with economists' estimates. According to the upwardly revised forecast, the OCR is projected to rise to 3.25% this year and peak at 4% in 2023. "It remains appropriate to continue to tighten monetary conditions at pace to maintain price stability and support maximum sustainable employment," the RBNZ said on Wednesday. The regulator said it "was resolute in its commitment" to keep inflation between its 1-3% target range.

Notably, the bank has raised the interest rate by 50 basis points for the first time since the introduction of the OCR in 1999. Some economists suggest that such actions carry certain risks that could stall the economy as high borrowing costs would hit the housing market and reduce consumer spending. However, the reaction of the economy is difficult to foresee as high inflation poses equally serious risks of harming the labor market and consumer spending. No one would want to pay more for something that used to cost less. The basic set of consumer goods in the basket is unlikely to change but demand for more durable and expensive products would dramatically decrease.

As a reminder, FRB of Atlanta President Raphael Bostic has recently said the Fed could potentially pause interest-rate increases in September, following expected half-point rate increases over the next two months. "I think a pause in September might make sense. After you get through the summer, and we think about where we are in terms of policy, I think a lot of it will depend on the ground dynamics that we are starting to see. I'm an optimist and I'm assuming inflation will have started to definitively move. My motto is observe and adapt," Bostic told the Rotary Club of Atlanta.

As for the RBNZ, there is a high likelihood that it will make one more half-point increase in June and will be lifting rates by a quarter-point at future meetings.

New forecasts published by the RBNZ show the cash rate peaking at 3.95% in the third quarter of 2023. In February, it forecast a peak of 3.35% in 2024. The new track shows the OCR starting to gradually decline from the second quarter of 2024 once aggregate demand and supply somewhat balance out. The central bank also sees inflation slowing to 3% in the second half of 2023 from a peak of 7% in the current quarter.