Reserve Bank of New Zealand will hold its first monetary policy meeting this year on February 22. In its last meeting in November 2022, with a 75bp rate increase, Central Bank in New Zealand raised its primary interest rate to 4.25%. With a significant upward revision to the Official Cash Rate (OCR), it reacted to the country's high inflation-encouraging activity indicators.
We expect the Reserve Bank of New Zealand to hike rates by 50bp to 4.75% for Wednesday's meeting. This is already priced in the market; however, some analysts still believe in a 75-bps rate hike, which considering the 9% price fall from the last meeting and deteriorated housing markets, seems unlikely.
Recently published data showed that New Zealand inflation has been steady at 7.2% in the fourth quarter of 2022. The RBNZ had forecast another acceleration to 7.5% and still believes it will be the Q1 2023's inflation before a slowdown to 6.90% in the third quarter.
About the RBNZ outlook in its statement and governor speech, we can still wait for more hawkish signs. RBNZ rate and inflation forecasts will be the main market driver, as 50-bps is already priced. Inflation is still high, and in many countries like US and Canada, we saw that after several months of decrease, prices again started to rise, which can happen in New Zealand as well. Therefore, after this 50-bps hike, we can still wait for a 75-bps hike to 5.5% as the prime rate target to end the rate hike cycle there. So, in line with the decision, we also have to follow the rate target and inflation expectation.
This expected decision is customarily supposed to help the Kiwi to gain against its crosses. However, we have other data as well that can cap its effect. Therefore, in the short term, it can help to rise above 0.6525, but to stay above this level, we need weakness in the USD Index chart; otherwise, a return under this level is more likely with 0.5580 as its next target.
