Top 3 takeaways after RBNZ hiked 50bp

A much-awaited event by currency traders just took place in the previous Asian session. The Reserve Bank of New Zealand (RBNZ) released its monetary policy statement, and it raised the official cash rate by 50bp.

Yet, the local currency, the New Zealand dollar (NZD), dropped, despite the central bank being hawkish regarding future rate hikes. Here are three things NZD traders should focus on moving forward:

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• RBNZ wants to hike more
• Inflation to keep climbing
• Today’s decision was priced in – buy the rumor, sell the fact

RBNZ to hike more

The market participants expected the RBNZ to hike the official cash rate, but not so aggressive. 25bp were priced in ahead of the release, and yet the RBNZ decided to do more.

In hindsight, the RBNZ was one of the most vocal central banks in this start of a global monetary tightening cycle. With inflation rising out of control and threatening price stability, the RBNZ did not hesitate at all.

Moreover, besides the rate hike, it also kept a hawkish forward guidance. In other words, the Monetary Policy Committee wants to hike some more in the near future.

Inflation to keep rising in the near future

Inflation in New Zealand has reached 5.9% YoY, much higher than the RBNZ target of 1%-3%. Because of the Russia-Ukraine war, the central bank expects inflation to keep rising. Hence, the bias for the official cash rate is to move even higher than the current 1.5% on the grounds of price stability being threatened by rising inflation.

Buy the rumor, sell the fact

Despite everything the RBNZ did or signaled, the NZD sold off, as seen in the chart above. After initially moving higher on a bigger rate hike than expected, the NZD/USD exchange rate quickly reversed course.

One explanation is that the RBNZ’s hawkish stance is no news to markets. As such, despite the bigger rate hike, the policy statement brings nothing new to the market participants.

Another is that an exchange rate reflects the value of one currency in terms of another. Therefore, if the RBNZ delivered a 50bp rate hike, traders’ expectations quickly shifted towards the Fed in the United States doing the same.

Overall, the RBNZ hiked more than expected, yet the NZD has given up its initial gains. Effectively, it means that the market participants expect the Fed to be equally aggressive in tightening the monetary policy.