Prospects for New Zealand's interest rate resolution: the second rate hike is expected to start, and the rate of increase may affect the fate of the New Zealand dollar

In October, the Reserve Bank of New Zealand raised interest rates by 25 basis points, which is widely expected by the market. The bank also stated that over time, monetary policy stimulus measures are expected to be further cancelled. New Zealand’s CPI soared to 4.9% in the third quarter, and the unemployment rate also hit a record low. It is almost certain that officials will activate the interest rate hike button again this week. However, the main question is whether they will raise interest rates by 25 basis points or 50 basis points.

Investors expect a 40% probability that the Reserve Bank of New Zealand will raise interest rates by 50 basis points

Of the 23 economists surveyed, 21 believe that the Reserve Bank of New Zealand will raise the official cash rate by 25 basis points to 0.75% on Wednesday. The two economists expect to raise interest rates to 1%. In addition, investors believe that the bank has the possibility of raising interest rates by 50 basis points. However, the Reserve Bank of New Zealand may also raise interest rates by 25 basis points, while hinting that the pace of tightening will accelerate in the future.

Sharon Zollner, chief New Zealand economist at ANZ Bank, said: “The market wants to know whether the Reserve Bank of New Zealand wants to move quickly and raise interest rates by 50 basis points. This question is entirely reasonable, but a substantial increase in the benchmark interest rate forecast may produce similar results. Effect."

Swap data shows that investors expect a 40% probability that the Reserve Bank of New Zealand will raise interest rates by 50 basis points. Investors increased their bets on a 50 basis point increase in interest rates last week after the survey results showed that inflation expectations in the two-year period rose to the highest level in a decade.

New Zealand’s job market is as tight as ever, with an inflation rate of 4.9% well above the 1-3% target of the Federal Reserve Bank of New Zealand and is expected to accelerate further. At the same time, the outlook is uncertain. On December 15, when Auckland lifted the anti-epidemic lockdown measures, New Zealanders are expected to usher in a situation where the epidemic will spread across the country.


(New Zealand's inflation level is soaring and the labor market is tight)

At the same time, New Zealand house prices are rising at an annual rate of more than 30%, and there is a long time window between the policy decision on Wednesday and the next policy meeting on February 23. This may encourage policymakers to consider increasing interest rates now.

Loan interest rates have soared, and major economies are still under pressure. It may not be necessary to raise interest rates higher than 25 basis points

However, since the Reserve Bank of New Zealand raised interest rates for the first time last month, mortgage rates have soared. This will have a strong slowdown in the housing market and retail spending for next year, ASB Bank senior economist in Auckland, Mike Jones, said: "Given the past 18 months, the surge in household debt, the RBNZ to increase the public debt will keep the pressure Be vigilant, the bank is also aware of the difficulties caused by the epidemic restrictions in some economic sectors."

Although New Zealand’s domestic economy is performing well, other major economies still face problems. Therefore, some analysts believe that the New Zealand Fed’s policymakers have no reason to rush to raise interest rates by more than 25 basis points.

This may disappoint those who expect more and may cause the New Zealand dollar to pull back when the news is announced. However, as long as the Reserve Bank of New Zealand is willing to continue to normalize its policies, this decline may be limited and short-lived. After all, the Reserve Bank of New Zealand will be the only major central bank to raise interest rates after the epidemic, and twice.

When the Reserve Bank of New Zealand released its latest economic forecast in August, the bank expected the cash interest rate to rise to a neutral level of 2% by the end of 2023. Economists now expect that the Reserve Bank of New Zealand will substantially increase this forecast to show that the benchmark interest rate will reach 2% by the middle of next year and will continue to rise thereafter. ANZ Bank’s Zollner said: “We believe that the final value of the Reserve Bank of New Zealand’s official cash rate is expected to be revised up significantly, possibly as high as 3%. ”


(The official interest rate of the Reserve Bank of New Zealand)

The New Zealand dollar fluctuated widely against the U.S. dollar, and moderate interest rate hikes may drag the New Zealand dollar lower

On Tuesday (November 24), the New Zealand dollar experienced considerable volatility against the U.S. dollar. The New Zealand dollar fell 0.5% against the U.S. dollar and hit a daily low of 0.6916, but rebounded to above 0.6950 during New York City time. In recent hours, the trading environment has gradually cooled as investors avoided further large bets before the New Zealand Federal Reserve made a monetary policy decision.

Since the beginning of this month, the New Zealand dollar has fallen by 3.0% against the U.S. dollar. Given the expectations of interest rate hikes, if the Reserve Bank of New Zealand raises interest rates by only 0.25%, the New Zealand dollar may fall further due to disappointment. Or, if the Reserve Bank of New Zealand raises interest rates by 0.5% or substantially raises its forecast and interest rate path forecast, this will constitute a firm positive for the New Zealand dollar. At present, the market expects that the probability of a 0.5% rate hike is about 40%, so if we really see such a move, the market has a lot of room for reaction.

Westpac is still optimistic about the currency pair in the medium term. Analysts said: "Global risk sentiment remains high, the New Zealand-US Treasury bond yield differential is still attractive, and New Zealand commodity prices are rising. We will continue to observe this downward trend. It is also expected that the New Zealand dollar will return to above the February high of 0.7465 against the U.S. dollar in the first quarter of next year."

Before the announcement of the New Zealand interest rate decision on Wednesday (November 24), the New Zealand dollar was basically stable against the US dollar, trading above US$0.6950.


(New Zealand dollar against the U.S. dollar daily chart)

GMT+8 At 08:33 on November 24, the New Zealand dollar traded at 0.6953/55 against the US dollar.