FX Viewpoint 8 Oct 2021 | NZD: The first rate hike in seven years, more to come | Article – HSBC VisionGo
- On 6 October, the RBNZ lifted its cash rate for the first time in seven years and signalled more rate hikes are likely to follow
- Our economists expect the next 25bp hike to come in November 2021, with further hikes due next year
- But the NZD weakened against the USD, probably because “global overpowers local”, in our view
The RBNZ increased its benchmark rate for the first time in seven years and signalled further tightening
After an abrupt weeks-notice halt to quantitative easing (QE) in July, which opened the door for cash rate hikes, and then the arrival of the Delta variant onshore a day before its 18 August meeting, which derailed an otherwise widely-expected hike, the Reserve Bank of New Zealand (RBNZ) eventually lifted its cash rate for the first time in seven years in October. The increase of 0.25bp in the cash rate to 0.50% was widely expected. The RBNZ foreshadowed further cash rate hikes, noting that “further removal of monetary policy stimulus is expected over time”.
Our economists expect the benchmark rate to reach 1.50% by end-2022
No new forecasts were released in the 6 October Monetary Policy Review. However, the RBNZ noted that it expects inflation to peak above 4% over the near term, with the risk that inflationary pressures become more persistent, according to the statement. Indeed, underlying inflation is above the midpoint of the RBNZ’s 1-3% target range (Chart 1), with potential supply-side upward risks to prices and wages, as New Zealand is an economy operating at or above full employment, in our economists’ view. Our economists’ central scenario is the RBNZ lifts its cash rate to 0.75% in November 2021, with further hikes through next year to 1.50% by end-2022, but the Delta variant and transitioning to “living with” the virus remain clear near-term downside risks to domestic growth.
We still look for modest NZD weakness against the USD over the next 12 months
The hike was largely priced in and the tone of the statement was not particularly dovish, and yet the NZD weakened against the USD (Chart 2). In our view, the NZD’s weakness may be a combination of “buy the rumour/sell the fact” and “global overpowers local” clichés. The “risk off” mood amid global inflation concerns and lack of progress on the US fiscal front was a further headwind to the NZD. A day later, the NZD stabilised somewhat, amid the US debt ceiling developments, which deadline on the debt ceiling is likely to be postponed until December (Bloomberg, 7 October 2021). We see NZD-USD moving in a narrow range over the near term, albeit with modest NZD weakness against the USD over the next 12 months.