RBNZ Interest Rate Decision Preview: Kiwi set to fly on a hawkish rate hike

The Reserve Bank of New Zealand (RBNZ) is set to extend its tightening cycle at its May policy meeting, which will be accompanied by the Bank’s upbeat economic projections and followed by Governor Adrian Orr’s press conference.

RBNZ: Another surprise 50 bps rate hike?

The Reserve Bank of New Zealand unexpectedly raised the key Official Cash Rate (OCR) by 50 basis points (bps) in April to tame "high and persistent" inflation, even though the Bank acknowledged easing economic growth through 2023.

This Wednesday, the Kiwi central bank is widely expected to deliver a 25 bps rate hike, lifting the OCR from 5.25% to 5.50%. The decision will be announced at 02:00 GMT. Governor Orr’s presser will follow at 03:00 GMT.

Markets are pricing a 25 bps rate hike this month, as New Zealand’s Consumer Price Index (CPI) rose 6.7% year-on-year in the first quarter, slower than the 7.2% increase seen in the fourth quarter. Despite softening price pressures in the South Pacific Island nation, inflation remains much above the central bank’s 1-3% target.

Additionally, New Zealand’s government announced a new spending boost in its Budget released last week. The government raised its bond programme with gross issuance up NZ$20 billion in the four years to June 2027 to NZ$120 billion. Economists and industry experts viewed the size of the new spending and the fiscal forecasts are more expansionary than they had anticipated, which are expected to fan inflationary pressures.

These arguments lay grounds for expectations that the RBNZ could surprise markets yet again with a 50 bps rate hike. Another hawkish surprise at the May meeting could be the central bank raising its terminal rate forecast from 5.50% to 6.0%, implying that the central bank has still some time before it winds up its tightening cycle.

Refinitiv's RBNZWatch Tool shows a 42% probability that the RBNZ will hike by 50 bps to 5.75% on Wednesday and a terminal rate of around 5.86% at the August meeting.

Trading NZD/USD with Reserve Bank of New Zealand decision

Should the Reserve Bank of New Zealand deliver a dual surprise by lifting the rates by 50 bps and raising the peak rate projection to 6.0%, the NZD/USD pair is likely to see a decisive flight toward the critical supply zone near 0.6390, from where the pair has faced rejection five times since early February.

On a 25 bps rate hike by the Kiwi central bank, with the terminal rate projection maintained at 5.50%, the Kiwi is likely to come under intense selling pressure, as it would suggest the end to the central bank’s tightening cycle. NZD/USD could tumble toward the confluence support at around 0.6240 on profit-taking-led by the dovish rate hike.

It’s worth noting, however, the NZD/USD reaction to the RBNZ policy announcement could also be influenced by the broader market sentiment and the US Dollar price action, as the US debt-ceiling negotiations continue and keep investors on the edge.