On Wednesday (May 24), the Reserve Bank of New Zealand announced a 25 bps interest rate hike to 5.5 percent. This number was in line with previous market consensus.
The RBNZ's decision to hike rates again today brings interest rates to their highest level since 2008. It was also cumulatively has raised rates by 525 bps since mid-2021.
In a press conference after the rate announcement, the RBNZ said that the rate is currently at its highest level. Meanwhile, it is likely to last for a longer time given the trend of consumer inflation is still considered very high.
The chairman Andrian Orr said that the central bank will maintain the monetary tightening cycle despite realizing it will have an impact on domestic economic growth which is likely to be depressed.
Kiwi Dollar Slumps on RBNZ's Dovish Statement
Furthermore, Orr said by keeping interest rates at high levels as they are today, it will reduce household spending. Besides that, inflation can be lowered as well.
With annual consumer inflation at 6.7% in the first quarter of 2023, the RBNZ insists the trend of high interest rates will last longer until there are signs of inflation moving down towards the target range of 1% to 3%.
Although the New Zealand central bank raised their interest rates again, the rate hike move this time actually suppressed the movement of the NZ dollar against the greenback.
At the time of this news writing, the NZD/USD pair was moving in the range of 0.6181 or down by 1.05 percent from the daily open price. This weakness led the Kiwi dollar to touch a 3-week low against the greenback.
A Pause in future Rate Hike is Possible
The sharp weakening of the NZ dollar yesterday afternoon was actually more due to the results of the RBNZ meeting. That meeting showed the central bank expects economic growth to slow in the coming quarters.
It was due to weakening consumption due to high interest rates. In addition, the RBNZ is also considering a pause in future rate hikes to observe what the impact of the series of hikes carried out so far.
That means, the institution interest rate is likely to stay at current levels for the next few months. Thus it was becoming a negative catalyst that suppresses the movement of the NZ dollar.
The US dollar dominated trading this Tuesday (May 23). That was following the statements by some Fed officials who were much more hawkish than Jerome Powell's speech at the end of last week.
USD/JPY is in It’s High Level
The US dollar index or it is called as DXY gained about 0.3% to the 103.60s range again. Meanwhile, the USD/JPY hit its highest level in six months.
Minneapolis Fed President, Neel Kashkari,said that the interest rates in America may need to rise to "more than 6%". It is needed to make inflation return to its 2% target.
The St. Louis Fed President, James Bullard, also thinks the central bank may have to raise interest rates by another 50 basis points within the year.
He stated that these are the most uncertain times that they have ever had in terms of understanding the underlying dynamics of inflation. So they are going to let inflation guide them.
30% Rate Hike is Expected
Besides that they also think that they may let inflation to guide them. Maybe they need to raise the interest rates by more than 6%, As kashkari said in an interview on CNBC's Squawk Box.
However, if the banking stress is effective to press the inflation, then the analysts maybe are getting closer to the end point. But they don’t know for sure now.
Their statement immediately hoisted market speculation, considering that the actual Fed interest rate currently only reaches the range of 5%-5.25%. Market participants now expect a 30% chance of further rate hikes in June.