New Zealand Dollar: RBNZ hawkish path supports currency – BBH

Brown Brothers Harriman’s (BBH) Elias Haddad reports that the Reserve Bank of New Zealand (RBNZ) delivered a 25 bps hike to 2.50%, largely priced in, triggering an New Zealand Dollar (NZD) rally before gains were trimmed by Middle East tensions. Haddad highlights that the RBNZ sees further Official Cash Rate (OCR) increases as likely, has room to normalize towards a neutral 2.2–4.1% range, and markets price nearly 100 bps of tightening over the next year.

Hawkish RBNZ and neutral OCR range

"The RBNZ raised the Official Cash rate (OCR) by 25bps to 2.50%, the first hike in three years, and indicated that “further OCR increases appear likely at upcoming meetings.” The RBNZ did not disclose the Committee’s vote split but indicated that the decision to increase the OCR was reached by consensus."

"The RBNZ estimated neutral range is between 2.2% and 4.1%. The swaps curve implies nearly 100bps of tightening over the next twelve months, which is nearly twice as much as the RBNZ policy path projection published in May."

"The RBNZ has room to normalize the OCR to more neutral levels which is NZD supportive. New Zealand inflation is still above target, and economic activity is expected to strengthen."

"RBNZ delivered a hawkish hike, which was 70% priced by markets. NZD rallied across the board before paring back gains on a re-escalation of the Middle East conflict."