The Reserve Bank of New Zealand (RBNZ) raised the official cash rate to 2.75% from 2.5% today, citing considerable momentum in the economy and more broad-based GDP growth. This was widely expected by the market, as Governor Wheeler had issued a number of hints prior to today’s meeting.
However, the market wasn’t expecting the RBNZ to suggest that interest rates could increase by 125bps this year and breach 5% in 2017, which makes another rate cut next month a distinct possibility. Given the higher outlook for interest rates in NZ, it’s not surprising the kiwi shot higher following the announcement.
As we stated in our RBNZ preview yesterday, the bank is gearing up for a prolonged tightening cycle, with the pace of interest rate rises dependent on the state of the domestic economy. There are significant price pressures in parts of the economy, the terms of trade continues to rise and earthquake reconstruction efforts continue to support economic growth. Rising inflation and a strong economy create the prefect recipe for tighter monetary policy. The bank is obliged to keep inflation from rising too fast and the fact the economy is experiencing broad-based growth creates the ideal environment for higher interest rates.
The kiwi
The bank did fire a warning shot at the NZ dollar, saying that it doesn’t believe that the current level of the exchange rate is sustainable in the long-term. But compared to the bank’s prior attempts to talk down the commodity currency, today’s comments were far less aggressive. In saying that, the bank may become more vocal about the kiwi if it continues to rise.
NZDUSD shot around 40 pips higher on the back of the RBNZ’s policy meeting, with the pair now hovering around 0.8520. This is an important resistance zone for the pair. If price action stalls around here it may drift back below 0.8500, but if it breaks through this level the path looks to be clear for a push towards a long-term resistance zone around 0.8550.
Source: FOREX.com
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