NZD/USD to see considerable gains toward 0.78 as RBNZ signals policy tightening – CE

The Reserve Bank of New Zealand sounded more optimistic at May’s meeting and signalled that it will start to hike rates in the second half of next year. The kiwi stands out surging above 0.73 – analysts at Capital Economics expect the NZD/USD pair to continue inching higher in the coming months.

RBNZ is signalling that monetary policy will be tightened before long

“The RBNZ kept policy settings unchanged at today’s meeting. However, the statement sounded more optimistic. The Monetary Policy Committee noted that activity remained “uneven” and argued that it had evolved broadly in line with the forecasts from February. However, the MPC noted that it now had greater confidence in the outlook given the rapid vaccine rollout overseas.”

“The Bank continued to downplay the marked slowdown in its bond purchases, arguing that it largely reflects lower issuance of government bonds. The Bank noted that the reduction in bond issuance means a lower scope of purchases within the limits of the indemnity provided by the Ministry of Finance. We suspect that a bigger factor behind slower purchases is the RBNZ’s self-imposed rule that the amount of bonds not held by the Bank shouldn’t fall below 20% of GDP. We estimate that it’s currently around 17% of GDP. As such, the slowdown in bond purchases may well continue.”

“The Bank is now more hawkish than we are as it believes that rates may need to be lifted to around 1.5% by end-2023 instead of the 1.0% level we have currently pencilled in.”

“With the RBNZ set to become one of the first central banks in advanced economies to hike rates, we think that the New Zealand dollar will continue to strengthen. Our end-2023 forecast for the NZD/USD pair is 0.78, from 0.73 today.”