New Zealand Dollar Gets its Hawkish Surprise as RBNZ Hikes by 50bp

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The New Zealand Dollar put some notable gains on the Pound, U.S. Dollar, Euro and other major currencies midweek after the Reserve Bank of New Zealand (RBNZ) raised interest rates by 50 basis points.

The hike exceeded the 25bp move the market was expecting with the RBNZ saying, "higher near-term CPI inflation increases the risk that inflation expectations persist above our target range".

Pound Sterling Live had reported in a number of preview pieces that the New Zealand Dollar was at risk of going higher in early April on such a 'hawkish' outcome.

"We think NZD will be more resilient as carry still has value in the current environment and cuts may take some time to materialise," says Elsa Lignos, Global Head of FX Strategy at RBC Capital Markets.

The Pound to New Zealand Dollar fell as low as 1.9590 at one point before paring its losses to 1.9684 at the time of writing.

Against the U.S. Dollar, the New Zealand Dollar rallied to a high of $0.6378 before paring the advance to 0.6341.

Support for the New Zealand Dollar comes as the RBNZ's move "was in contrast to many of its overseas peers, who have tended to look to slow the pace of increase after last year’s flurry of rate hikes," says Kelly Eckhold, an economist at Westpac.

The RBNZ justified the move after noting the cost of lending in New Zealand had in fact fallen since February and therefore a strong move was required to keep conditions necessarily tight.

Specifically, the RBNZ said "wholesale interest rates have fallen significantly since the February statement, and this could put downward pressure on lending rates. As a result, a 50 basis point increase in the OCR was seen as helping to maintain the current lending rates faced by businesses and households."

The RBNZ's February projections showed economists at the central bank believed the OCR would need to go as high as 5.5%, and there was little in the guidance to suggest this was still not the case.

Therefore a further 25bp of tightening looks to be on the cards, signalling a clear end-point to the hiking cycle is looming.

So while the surprise of a 50bp move offered the NZ Dollar some support, investors now have a clear view of the summit, potentially limiting the NZD's upside potential from here.

It certainly helps explain why the currency has reversed from its initial highs.