The Reserve Bank of New Zealand Raised Rates for the 6th Time in a Row

Aggressive Tightening Path

The Reserve Bank of New Zealand (RBNZ) raised the official cash rate (OCR) to 2.5% ^[1] - the highest levels since January 2016. This marked the third 50 basis points hike in a row and the sixth consecutive upward adjustment, both of which have not happened since 1999 when the OCR was introduced.

The decision did not offer many surprises, since the central bank reiterated the view that it is "appropriate to continue to tighten monetary conditions at pace to maintain price stability and support maximum sustainable employment".

Furthermore, the Committee is "comfortable" with the tightening path it had outlined in May, which projected the OCR at 3.4% by the end of the current year, before peaking at 3.9% in 2023 ^[2]. Officials expressed confidence that this plan will achieve the inflation and employment objectives, without sparking "unnecessary instability in output, interest rates and the exchange rate".

High Inflation & Resilient Economy

The RBNZ is way ahead of its major counterparts – including the Fed – in normalizing monetary policy, since its rate hike cycle started in October 2021 and has resulted in 225 basis points worth of increases so far.

The main driver behind aggressive tightening strategy is high inflation, with the Consumer Price Index (CPI) having surged to 6.9% year-over-year in Q1, which was the highest level in three decades. The second quarter figures are due next week, while the RBNZ expects it to peak at 7%.

Today, it acknowledged near-term upside risk to consumer price inflation and emerging medium-term downside risks to economic activity, but New Zealand has shown remarkable resiliency.

Unemployment stood at record lows of 3.2% in the first quarter of the year and although GDP contracted by 0.2% on the same period compared to the prior quarter, the annualized GDP grew by a healthy 1.2%.

NZD/USD Reaction

Despite RBNZ's dominance in monetary tightening, NZD/USD depreciated by around 10% in the second quarter, as the US Fed kicked-off it rate hike cycle. The central bank of New Zealand noted today, that the weaker NZD continues to impact import prices, but refrained from any explicit comment on the exchange rate.

The third quarter has started on the back foot as the Fed's actions and fears of global economic slowdown boost the greenback, with NZD/USD hitting 2+ year lows this week. Today's decision created some volatility, but had limited net result.

US Dollar strength trumps everything at this stage and until this changes, any upside is seen as limited.