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- The Reserve Bank of New Zealand to raise OCR by 25bps to 1.25% in April.
- Increased odds that the RBNZ could deliver a 50-bps hike to tackle inflation.
- The kiwi’s turnaround hinges on the central bank’s tightening outlook.
NZD/USD is keenly awaiting the Reserve Bank of New Zealand (RBNZ) policy meeting next Wednesday to find some comfort after being smashed to two-week lows below 0.6900 on the aggressive Fed’s tightening outlook. The RBNZ is set to announce its interest rate decision on Wednesday, April 13, at 0200 GMT.
RBNZ to surprise with a double shot hike?
The RBNZ is widely expected to increase the Official Cash Rate (OCR) by another 25bps from 1% to 1.25% on Wednesday. If the expectation is met, the central bank will hike rates for the fourth straight meeting. This meeting will not be followed by Governor Adrian Orr’s press conference.
A majority of the economists polled by Reuters predicted a 25bps lift-off this month, although a quarter of them kept doors open for a 50-bps increase. The overnight index swaps (OIS) roughly price in seven rate hikes from the central bank, expecting the OCR to reach 2.50% or higher by the end of this year.
It’s a tough call for the RBNZ as it is for the other major central banks globally, as it looks to tame the runaway inflation while keeping the economy afloat. The offshore risks have increased amid surging commodity prices, especially in light of Russia’s invasion of Ukraine.
Previously, the coronavirus pandemic-led supply chain disruptions and a tight labor market have already driven inflation to a 30-year high of 5.9% in the fourth quarter of 2021, far exceeding the central bank’s 1-3% target range.
With New Zealand’s Q4 GDP having rebounded 3.0% over the quarter to be up 5.6% year-on-year and the Unemployment Rate at 3.2%, the central bank is in a position to deliver a 50-bps rate hike this month. Although the Reserve Bank will be watchful of its action stifling economic growth and may avoid a hard-landing at this point.
Sooner than later, the RBNZ will step up its hawkish rhetoric in cohesion with the Fed and the Reserve Bank of Australia (RBA). The RBA left its key rates unchanged on April 5 but dropped the ‘patient’ pledge on inflation developments, hinting at a potential rate hike in upcoming meetings. The Fed March meeting minutes suggested that the board remains poised to trim the balance sheet and go in for a 50-bps hike at its May meeting.
Trading NZD/USD with RBNZ decision
Wednesday’s RBNZ announcement will be critical for kiwi’s fate, as it hangs around fortnightly lows amid risk-off markets, in the face of the additional Western sanctions against Russia’s atrocities and the hawkish Fed’s outlook.
A double shot rate hike is needed to provide the much-needed reprieve to kiwi bulls, which could send NZD/USD back towards the monthly highs of 0.7035.
The currency pair could witness a ‘sell the fact’ trading if the RBNZ delivers the expected 25 bps hike while sounding cautious on future rate hikes.
Risk sentiment at the time of the policy announcement, however, could influence the pair’s reaction amid the protracted Russia-Ukraine conflict.
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