RBNZ Interest Rate Decision Preview: NZD/USD – Buy the rumor, sell the fact on a 75 bps hike

• The Reserve Bank of New Zealand is set to hike OCR by 75 bps to 4.25% in November.
• All eyes will be on the updated OCR track and RBNZ Governor Adrian Orr’s press conference.
• NZD/USD remains a ‘sell the fact’ trade but risk sentiment holds the key.

The Reserve Bank of New Zealand (RBNZ) Governor Adrian Orr’s "laser-like" focus on controlling inflation is set to break the bank’s habit of raising its lending rate by 50 basis points (bps) on Wednesday when the central bank’s board members meet to decide on their next monetary policy move.

A 75 bps Reserve Bank of New Zealand rate hike is fully baked in

The Reserve Bank of New Zealand is widely expected to increase the Official Cash Rate (OCR) by 75 bps from 3.5% to 4.25% on November 23, which would be the first super-sized rate hike after five consecutive 50 bps moves. This policy announcement will be followed by a press conference with RBNZ Governor Adrian Orr.

Economists expect the Reserve Bank of New Zealand to lift the cash rate by a record 75 bps while money markets wager a roughly 65% probability for the biggest-ever rate point hike this month.

Why does there seem to be a clear case for an outsized rate increase? New Zealand’s annualized Consumer Price Index (CPI) rose by 7.2% in September 2022, a slight fall from August’s print, according to Stats NZ, but still higher than experts thought. The critical inflation gauge surpassed the market consensus of 6.5% by a big margin. The latest RBNZ survey showed that the one-year-ahead and two-year-ahead inflation expectations increased to 5.08% and 3.62%, respectively.

The RBNZ has also changed its message: at its October policy announcement, the Reserve Bank of New Zealand said that the committee considered whether to increase by 50 or 75 bps during the meeting as against the previous policy statement that mentioned that they “did not consider 75 bps rate hike today,” explaining that “50 bps moves have been orderly and sufficient.”

With the critical Consumer Price Index having quickened at the fastest pace since the June quarter of 1990 and amid the central bank’s debate over a 50 or 75 bps rate hike, markets are convinced that the Reserve Bank of New Zealand needs a bigger rate increase to bring down inflation.

Another reason for the Reserve Bank of New Zealand to go big on the OCR rise is that there is a three-month wait until the next central bank meeting, which will be in February next year.

The RBNZ’s updated economic forecasts in its Monetary Policy Statement (MPS) will be closely scrutinized too, now that a 75 bps rate hike is widely anticipated. A revision to the prospective trajectory of the Official Cash Rate will hold the key as also the forecasts for peak inflation. The Overnight Index Swaps (OIS) pricing points to a peak rate of just above 5%, at the moment.

Trading NZD/USD with Reserve Bank of New Zealand decision

NZD/USD could fall back toward the 0.6000 threshold on a ‘sell the fact’ effect should the Reserve Bank of New Zealand conform to the market expectations of a super-sized lift-off.

In case the central bank unexpectedly hikes rates by 50 bps and revises down the OCR track, the NZD/USD pair could also break its recent consolidative phase to the downside.

The pair needs an upward revision to the RBNZ rate hike trajectory and hawkish rhetoric from Governor Adrian Orr to resume its march toward 0.6250.

However, risk sentiment and the US Dollar dynamics, at the time of the policy announcement, could have a significant impact on the pair's reaction to the RBNZ verdict too and need to be taken into consideration when positioning for any moves.