New Zealand Dollar RBNZ Reaction: "The Kiwis are Comfortably Resting in the Nest"

• GBPNZD rests near three-year highs
• NZDUSD extends July rally
• RBNZ guidance shows little rush to hike again
• But Westpac says another hike to come in Aug.

Above: File image of Governor Adrian Orr. Image courtesy of Central Bank of Chile.

The New Zealand Dollar was softer through the hours following a Reserve Bank of New Zealand (RBNZ) announcement that it would keep interest rates unchanged and that it was not ready to resume raising interest rates again anytime soon.

New Zealand bond yields - a key consideration for the NZ Dollar - declined as investors lowered expectations for the prospect of further hikes after the RBNZ signalled comfort with the OCR at 5.50%.

"The NZD is down against all G10s overnight after the RBNZ opted to hold rates and delivered a dovish statement. The Committee justified that they are at the end of the hiking cycle, even as many other central banks recommence rate hikes, by stating that New Zealand reached a more restrictive level earlier than many other economies," says Noah Buffam, a strategist at CIBC Capital Markets.

The RBNZ said in a statement it is confident that with interest rates remaining at a restrictive level for some time, consumer price inflation will return to within its target range of 1 to 3% per annum.

The Pound to New Zealand Dollar exchange rate spiked but promptly retreated in the hour following the decision before stabilising again. The pair ultimately remains near three-year highs reached on the prior day and there is little in the RBNZ's guidance that would suggest the uptrend has been challenged by the central bank.

"Financial markets wound back expectations for a further hike following the meeting. A further 25bp hike is now around 50% priced," says Kristina Clifton, an analyst at CBA.

The New Zealand Dollar-U.S. Dollar exchange rate has been on the rise in July and the pair rose to its highest level since June at 0.6239 in the wake of the RBNZ before trending lower to 0.6185 at the time of writing.

Against the Aussie, a period of short-term consolidation extends with AUD/NZD briefly spiking to 1.0832.

Guidance from the RBNZ leads economists at CBA to maintain an expectation that 5.50% will be the peak in this tightening cycle. "If we are correct, a further unwinding of financial market pricing for RBNZ rate hikes can weigh on NZD/USD and support AUD/NZD," says Clifton.

Such an outcome for these two exchange rates would offer further mechanical support for the upward-trending GBP/NZD.

"There is little here for either the hawks or the doves," says Kelly Eckhold, an economist at Westpac. "The kiwis are comfortably resting in the nest."

Eckhold notes the commentary as being short, indicating a less controversial discussion at the MPC, and indeed there was a consensus for unchanged rates this time around.

"Keeping the commentary short probably also reflected a desire to not say anything that might disturb expectations, as we had indicated would be likely in our MPR preview," he adds.

Westpac remains of the view that the OCR will be increased by 25 basis points to 5.75% at the August Monetary Policy Statement as by then more important data will have been released that will allow another move at the central bank.

Data to watch this month are CPI inflation for the second quarter (July 18) and the labour market report (August 02) which should give markets more insight into the persistence of core inflation pressures.

"Partial indicators suggest the labour market has not cracked yet. This raises the potential that the RBNZ will need to upgrade their growth forecasts for this year closer to those of our own," says Eckhold.