The Reserve Bank of New Zealand raised interest rates again, reaffirming its dovish stance

A year’s rise

The Reserve Bank of New Zealand was the first major central bank to raise interest rates, doing so exactly a year ago (in October 2021), beating the Bank of England, whose hike came two months later.

Today it raised rates by 50 basis points, fixing the official cash rate at 3.5%. The highest level since April 2015. It was the eighth consecutive move of this magnitude and the eighth consecutive rise overall.

The bank is undergoing its most intense tightening cycle since the policy rate was introduced in 1999, up 325 basis points from last year’s hike.

Aggressive position

Given the high interest rates and their often adverse impact on the economy and their delay, it would not be unreasonable for the authorities to soften their stance. A day earlier, their Australian counterparts did the same, with the RBA raising rates by just 0.25%, slowing the pace of their tightening cycle.

However, RBNZ policymakers showed no sign of a reversal **, but even discussed the possibility of an even bigger 75 basis point move, as meeting minutes showed. In addition, they considered it perfect “Monetary conditions continue to tighten at pace”.

Already in August, the central bank upgraded its forecasts for the official interest rate (OCR), which will peak at 4.1% next year** and expect it to remain at this level until 2023, increasing by 50 and 75 basis points. points. The central bank has one more monetary policy meeting this year and the first in 2023 is expected in February.

High Inflation & Resilient Economy

As the Consumer Price Index (CPI) rose to 7.3% (yoy) in the second quarter, rising inflation did not leave much room for a slowdown. The highest level in thirty-two years. In the August projections, the bank considered this level to be the maximum, but in any case, it expects it to be higher next year.

The committee commented today on the depreciation of the Kiwi and, if it continues, the meaning “Higher Upside Risk to Inflation on Forecast Horizon”.

Regarding the labor market, the Committee considered “It’s still tight”, the unemployment rate in the second quarter was 3.3%, slightly higher than the all-time high of 3.2%. However, the RBNZ has raised its forecasts and is ahead of 4% in 2023 and 5% in 2025.

Officials also acknowledged the recent recovery in gross domestic product, which grew a healthy 1.7% in the second quarter (qoq) after contracting 0.2% in the first quarter, but the bank expects much stronger growth rates.

Overall, the economy is resilient, allowing the central bank to continue its aggressive tightening, but early warning signs are here and it remains to be seen when it will slow down.

reaction NZD/USD

Last week the pair fell to its lowest level since April 2020, marking its seventh consecutive loss, amid risk aversion and the dominance of the US dollar. The greenback was later reduced, allowing NZD/USD Get some rest.

Today’s RBNZ decision lifted the pair early. However, the move was contained by the 38.2% Fibonacci retracement from the September high and low and gains were quickly erased.