AUD/NZD struggles to extend recovery above 1.0640 as RBNZ-RBA policy divergence stretches

The AUD/NZD pair is struggling in stretching its recovery above 1.0640 in the Asian session. The cross may face tough barricades as the impact of the surprise 50 basis points (bps) rate hike by the Reserve Bank of New Zealand (RBNZ) is expected to remain for a decent period.

On Wednesday, RBNZ Governor Adrian Orr went ahead of expectations and hiked its Official Cash Rate (OCR) by 50 bps to 5.25%. RBNZ Orr went for a bumper rate hike as New Zealand’s inflation has turned extremely sticky. New Zealand’s quarterly inflation rate has remained steady at 7.2% in the last three quarters.

Reuters reported that the New Zealand economy is expected to have shrunk by 0.3% this quarter, following a 0.6% contraction in the final three months of 2022. In spite of anticipation of contraction in the economic activities, the RBNZ went for a mega rate hike keeping the stubborn inflation as its foremost priority.

About interest rate guidance, Economists at ING believe that even in the event of another hike and the 5.50% projected peak rate is reached, the chances of rate cuts by the end of the year have now increased materially, and markets are likely underestimating them.

On the Australian front, Reserve Bank of Australia (RBA) Governor Philip Lowe kept doors open if further rate hikes are required, cited in his commentary on Wednesday. The statement came after the RBA kept its monetary policy unchanged on Tuesday in hopes that the current monetary policy is restrictive enough to tame persistent inflation. Australian inflation has softened dramatically from the peak of 8.4% to 6.8% in February.