New Zealand Dollar: Hawkish RBNZ but kiwi seen vulnerable – Commerzbank

Commerzbank’s Volkmar Baur reports the Reserve Bank of New Zealand (RBNZ) lifted the Official Cash Rate (OCR) to 2.5%, with the New Zealand Dollar (NZD) gaining slightly versus US Dollar (USD). RBNZ’s tone was more hawkish than expected, addressing structural inflation risks, and Commerzbank still looks for one more hike. However, they see market pricing of three additional hikes as excessive, expecting kiwi weakness once expectations are pared back.

Market overpricing future OCR hikes

"As we expected, the Reserve Bank of New Zealand raised the official cash rate (OCR) this morning to 2.5%. The kiwi reacted positively to this move and gained slightly against the USD after having fallen significantly in recent weeks. In its statement, however, the central bank’s tone was, on the whole, perhaps a bit more hawkish than we would have expected."

"We, too, had anticipated a certain hawkish undertone. After all, it is unclear exactly how inflation will develop in the coming months, and the bank naturally does not want to rule out the possibility of raising rates again. We, too, expect the RBNZ to raise the OCR again at one of its next two meetings."

"The RBNZ’s hawkish tone, however, went beyond the inflation shock triggered by the Iran conflict. Structural factors were also addressed that could potentially make it necessary to raise the cash rate further. Low productivity was mentioned here, among other things, as a factor that could structurally increase price pressures."

"We also recognize the problem of low productivity growth. Over the coming months, however, we expect the economy to be too weak to sustain price pressures. Governor Breman is quoted in a similar vein in the statement when she says that high inflation could weigh on household demand."

"We therefore stand by our assessment that, while we expect another rate hike in the coming months, that is all we anticipate. As of today, the market is pricing in three additional OCR hikes over the next 12 months. We believe that is too much. Once the market begins to adjust its expectations in this regard, the kiwi is likely to come under pressure again."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)