Above: RBNZ Governor Adrian Orr. File Image © Pound Sterling, RBNZ.

The New Zealand Dollar climbed against all other major currencies in the mid-week session after the Reserve Bank of New Zealand (RBNZ) reiterated a hawkish outlook for its cash rate, stemming a month of underperformance by the Kiwi but drawing mixed responses from analysts and economists. 

New Zealand's cash rate was lifted from 4.25% to 4.75% on Wednesday, making for its highest level since 2008, while updated forecasts suggested last quarter's stall of inflation will not be enough on its own to deter the RBNZ from raising benchmark to a peak of 5.5% later this year. 

February's forecasts indicated this peak is likely to be seen in the second half of 2023 and that the cash rate could remain there until late in 2024.

Projections for other variables were tweaked slighly with a modestly weaker economic growth outlook for 2023 counterbalanced with somewhat improved prospects for next year, while there were also minor reductions in forecasts for inflation this year and next.

The better development for Kiwis was a small decline in unemployment projections for each of the next two years, suggesting the effort to return inflation to within the 1% to 3% target range will be less costly for the labour force than was previously expected. 

While this would appear to have stemmed a February-long period of New Zealand Dollar underperformance resulting from this month's natural disasters, it has also drawn mixed responses from local and international analysts, some snapshots of which are included below. 

Jarrod Kerr, chief economist, Kiwibank

"The statement was overtly hawkish and without any backward steps. According to the RBNZ, inflation rates are simply too hot – still. The OCR track was effectively unchanged. More rate hikes are likely. And the risk of overtightening intensifies." 

"The market reaction to today’s statement was rather muted. Rates traders pushed yields back down from intraday highs. And the hawkish tilt provided just a slight boost to the Kiwi currency. Financial markets have the RBNZ’s OCR track largely priced."

Francesco Pesole, FX strategist, ING 

"The Reserve Bank of New Zealand's decision overnight was fully in line with our expectations: a 50bp rate hike to 4.75%, a hawkish tone, and unchanged rate projections. The New Zealand dollar is trading stronger after the announcement and press conference by Governor Adrien Orr, but it still seems like the instability in global risk sentiment is putting a cap on NZD/USD gains at the moment."

"Interestingly, the new RBNZ projections included an even larger (and longer-lasting) slump in the housing market. This seems to us another attempt to sound hawkish and to re-link the market pricing with the 5.50% projected peak rate, as the housing correction appeared to many – including us – as the main reason to stop hiking earlier."

"We still think there is a high risk that the 5.50% peak rate will not be reached unless the impact of the cyclone effectively stops the deflationary process. Markets are pricing in 35bp for the 5 April meeting: it’s important to note that there are no key data releases except 4Q GDP before that date. A 25bp increase looks more likely, but we wouldn’t exclude one last 50bp move before data deteriorate in the second quarter."

Andrew Boak and Sid Bhushan, economists, Goldman Sachs

"Governor Orr emphasised the RBNZ's commitment to curbing inflation, and pushed back against the notion that easier monetary policy should be used as a tool to help with the rebuild (while highlighting the difference in the macro environment compared to the 2011 Christchurch earthquakes when the RBNZ eased by 50bp)."

"We view today's meeting outcome as largely in line with our expectations - in that the RBNZ welcomes the recent easing in inflation and domestic demand, but highlights significant price pressures in the economy and medium-term upside risks to inflation and inflation expectations from the recent weather events."

"We continue to expect the RBNZ to further ease the pace of hike to 25bp at the April meeting - alongside further easing in demand pressures and global inflation - before pausing, with the risk skewed to a more elongated hiking cycle than we currently expect." 

"The move lower in AUD/NZD today reflects the RBNZ meeting but also a miss on quarterly wage data in Australia."

Lee Hardman, currency analyst, MUFG

"The main trigger for the kiwi’s rebound has been the RBNZ’s latest policy update overnight that has disappointed expectations for less hawkish rate guidance." 

"The timing of reaching to the terminal rate was pushed back a little from Q3 to Q4. It suggests alongside comments from Governor Orr that “we’re in a more flexible position” that affords more time assess the ongoing impact of previous policy tightening, that the RBNZ is more inclined to slow the pace of hikes further by delivering smaller 25bps hikes at upcoming policy meetings." 

"The openness to slow the pace of hikes further partially offsets the hawkish signal from keeping plans for the policy rate to peak at 5.50%. At best we see today’s RBNZ policy outcome providing only temporary support for the kiwi which has been one of worst performing G10 currencies so far this year."

Sharon Zollner, chief economist, ANZ 

"The RBNZ’s growth and inflation forecasts, like everyone else’s, are of limited usefulness, given events. But for the record, the inflation forecast is little changed, wage growth was revised a little lower, and GDP revisions since November are much larger than forecast changes."

"A lot more will be known about the impacts of Cyclone Gabrielle by the April Monetary Policy Review, where we continue to expect a 25bp hike."

"Given the likely medium-term inflation impacts of the cyclone, we see the risks around our forecast 5.25% OCR peak as now tilted to the upside. However, like the RBNZ, we’re in wait-and-see mode until the picture becomes clearer." 

Kristina Clifton, economist and currency strategist, Commonwealth Bank of Australia

"NZD/USD rose over the Asian trading session supported by the RBNZ’s 50bp interest rate hike and hawkish communication. There had been some speculation that the RBNZ would keep the interest rates on hold because of the devastation from Cyclone Gabrielle."

"The impacts of weather disasters tend to add to inflationary pressures in the short term as demand for goods, materials and labour to rebuild increases."

"The RBNZ noted the “best contribution monetary policy can make is to free up resources by slowing demand elsewhere in the economy with higher interest rates”. Our colleagues at ASB expect one further 50bp hike from the RBNZ in the current tightening cycle, although acknowledge the risk lies towards more increases."

Michael Gordon, acting chief economist for New Zealand, Westpac

"There was no consideration of delaying interest rate hikes in response to Cyclone Gabrielle’s impact, noting that fiscal policy could address this more effectively. The Committee judged that the effects of the cyclone did not materially alter the outlook for monetary policy over the medium term. However, it is still early days in terms of assessing the scale of its impact, particularly in terms of the amount of rebuilding work it will generate." 

"The RBNZ is clearly grappling with an uncertain environment, even before the impact of Cyclone Gabrielle. It still sees upside risks to inflation in the near term. However, it also sees the risks being towards a shorter and sharper downturn in activity, and a more intense impact on household spending as homeowners roll on to higher mortgage rates."

"Our current forecast is for the OCR to peak at 5.25%. In the coming months we expect to see more evidence that higher interest rates are having a restraining effect on demand, which would give the RBNZ some comfort that it has done enough to put inflation on a path back towards the 1-3% target range."