RBNZ Hawkish Statement Hints at Rate Hike

The Reserve Bank of New Zealand hints at normalising its monetary policy. The New Zealand dollar reacted by reaching a new high against its peers.

The Reserve Bank of New Zealand (RBNZ) issued its monetary policy statement this Wednesday and took markets by surprise. It hinted at a rate hike as early as Q3 2022 and, with it, the start of a tightening cycle.

The RBNZ is one of the most proactive central banks in the world. It was the first one to institute the inflation-targeting framework in the 70s, a model followed by other central banks in the developed world ever since.

As a result of this week’s statement, the New Zealand dollar traded with a hawkish tone. It gained about two big figures (i.e. two hundred pips) against the US dollar and also gained against the Australian dollar and other peer currencies.

Key Points from the May 2021 RBNZ Monetary Policy Statement

The RBNZ left its Large-Scale Asset Purchases (LSAP) program unchanged at $100 billion. Under the program, the central bank buys Local Government Funding Agency (LGFA) bonds and New Zealand Government Inflation-Indexed Bonds in the secondary market. The program is intended to last until June 2022, and right after that, the RBNZ signaled its willingness to start a tightening cycle by delivering its first rate hike. Currently, the Official Cash Rate (OCR) is kept at the lower boundary of 0.25%, and inflation in New Zealand is at 1.5%.

The central bank acknowledges both the challenges and opportunities ahead. On the one hand, the New Zealand’s economy continues to recover from the COVID-19 pandemic, in line with the global recovery. On the other hand, growth has been uneven across sectors.

Also, general business sentiment has improved lately, fueled by a resilient labour market. The unemployment rate in New Zealand fell to 4.7% in March and inflation is expected to rise in the short to medium term. Supply-chain disruptions caused by the pandemic are expected to ease toward the end of the year, and also house price inflation.

While the RBNZ used an upbeat tone to describe the current state of the economy, it still suggests that monetary stimulus remains necessary at this point. Yet, financial markets trade on future expectations, and the upbeat tone and suggestion that a hike is coming as soon as 2022 were enough to boost the New Zealand dollar.