Breaking: RBNZ hikes by 25bps, NZD/USD attempts to break 0.6750

The Reserve Bank of New Zealand met market expectations on Wednesday by lifting the cash rate by 25bps.

Of most interest for the market in the statement and press conference will be the Bank's forecast OCR track and details regarding how it plans to run down its LSAP holdings.

Key notes

• RBNZ says more tightening needed.
• Says also agreed to commence the gradual reduction of the reserve bank’s bond holdings under the large scale asset purchase,LSAP, programme.
• Says agreed it remains appropriate to continue reducing monetary stimulus.
• Says some short-term economic disruption is expected given the current growing covid-19 health challenge.
• Says economic capacity pressures have continued to tighten
• Says headline Consumer Price Inflation is well above the reserve bank’s target range but will return towards the 2 percent midpoint over coming years.
• RBNZ says the committee agreed that further removal of monetary policy stimulus is expected over time.
• Says headline cpi inflation is well above the reserve bank’s target range but will return towards the 2 per cent midpoint over coming years.
• Says employment is now above its maximum sustainable level.
• Says a broad range of economic indicators highlighting that the New Zealand economy continues to perform above its current potential.
• Says managed sales of bond holdings, in addition to not investing the proceeds of maturities, were most consistent with achieving their mandate over time.
• Says intends to commence bonds sales in July.

OCR projections

• Sees OCR at 1.49% in June 2022 (pvs 1.51%).
• Sees OCRat 2.57% in March 2023 (pvs 2.3%).
• Sees TWI NZD at around 71.6% in March 2023 (pvs 75.1%).
• Sees annual Consumer Price Index 3.2% by march 2023 (pvs 2.9%).
• Sees OCR at 2.84% in June 2023 (pvs 2.4%).
• Sees OCR at 3.35% in March 2025.

RBNZ Minutes 

Committee also affirmed that it was willing to move the OCR in larger increments if required over coming quarters.

OCR is expected to peak at a higher level than assumed at the November statement

Sales of the bank’s LSAP bond holdings may put some upward pressure on longer-term interest rates.

Many members saw this as a finely balanced decision whether to move the OCR up by 25 or 50 basis points.

Committee agreed that higher interest rates were consistent with house prices becoming more sustainable.

The impulse to growth from fiscal support is now ebbing and will wane.

Committee reached a consensus to not reinvest the proceeds of any upcoming LSAP bond maturities.

NZD/USD update

NZD/USD was trapped above old hourly highs acting as support near 0.6730 ahead of the event and has subsequently popped in to test the 0.6750 resistance on a more hawkish outcome than what might have been expected in the detail.

The following is a top-down analysis of NZD/USD drawn ahead of the event with an emphasis on the downside from a long-term point of view while below the 0.6770s: 

• NZD/USD Price Analysis: RBNZ in focus, key levels and market structure to watch

Why the RBNZ matters to traders

The Reserve Bank of New Zealand (RBNZ) holds monetary policy meetings seven times a year, announcing their decision on interest rates and the economic assessments that influenced their decision. The central bank offers clues on the economic outlook and future policy path, which are of high relevance for the NZD valuation. Positive economic developments and an upbeat outlook could lead the RBNZ to tighten the policy by hiking interest rates, which tends to be NZD bullish. The policy announcements are usually followed by Governor Adrian Orr’s press conference.