RBNZ squares up to inflation battle

Has the RBNZ just set a precedent as the AUDNZD falls?

At the end of 2021 the RBNZ was the most hawkish central bank of the G8 currencies. They have hiked again by 50bps, but crucial they have raised the terminal rate to nearly 4%. This is the RBNZ saying that they need to do more to tackle inflation quickly. Is this a sign of things to come? Will other central banks now follow?

RBNZ signals intent on inflation battle

Heading into the meeting STIR markets had priced in a 100% chance of a 50bps hike. That was expected. However, the raising of the Official Cash Rate (OCR) and Governor’s Orr’s forecast was what got all the attention and lifted the NZD higher. 

The stated aim from the RBNZ is to raise the OCR rate (interest rate) to a level that brings consumer inflation down.  Here is a signal of their intention: 

  • Sep 2022 now at 2.68% vs 1.89% prior 
  • June 2023 now at 3.88% vs 2.84% prior
  • Sep 2023 now at 3.95% vs 3.1% prior

And then the RBNZ see the interest rate dropping in June 2025

  • OCR for June 2025 now at 3.5% vs 2.6% prior. 

The RBNZ recognised that those with high debt levels would be pressured by the rising interest rate levels. However, Governor Orr stated that he was confident that households can withstand higher rates. The RBNZ stressed that the risk is of doing too little too late is worse than doing too much too soon. 

AUDNZD falls ahead?

This is a bullish move by the RBNZ and means the NZD has reasons for more strength as the RBNZ hike rates. AUDNZD selling makes sense as long as the RBNZ looks like being more aggressive that than the RBA in terms of hiking rates. The main risk to AUDNZD falls is if New Zealand’s economy slows and can’t take higher interest rates or if the RBA needs to start hiking quickly too. Another key point to note is if the RBNZ are getting tougher on inflation, will other central banks follow too? Follow along with me day by day as we look at major market developments.