A strong domestic economy means the Reserve Bank of New Zealand (RBNZ) could raise interest rates as early as August, giving an uplift to the Kiwi dollar by yield-hungry investors.
Last week the RBNZ decided to end its quantitative easing programme on the back of booming house prices and first quarter growth of 1.6%.
Economists have told Capital.com they now expect the central bank to start a series of interest rate rises next month.
Rate hike cycle
“Our current expectation is that the RBNZ will hike interest rates in the August Monetary Policy Statement (MPS), followed by a subsequent hike in each MPS till [the] interest rate reaches 1.75% in 2022,” said Finn Robinson, economist at Australia and New Zealand Banking Group (ANZ).
The interest rate or the official cash rate in New Zealand is currently 0.25%.
“The RBNZ’s cash rate is already higher than Australia, the United Kingdom or the European Central Bank. Yet, the markets have already fully priced in a rate hike by October 2021. That is just an enormous contrast with most other countries,” Sean Callow, senior currency strategist at Westpac told Capital.com. Callow also predicts an August rise by the RBNZ.
Callow says the RBNZ’s decision to end quantitative easing and indications of an interest rate hike makes the Kiwi dollar “the currency to jump on in terms of yield”, which should boost the currency against the greenback.
“Markets are pricing in higher interest rates, but when you actually see them occur, that could be quite a jolt and you could see some appreciation of the New Zealand dollar,” said Robinson.
Rate rise “premature”
Economists though are divided over the rationale of New Zealand entering an interest rate hike cycle in 2021, with Callow suggesting a rise could be premature.
“It is an interesting move, but I find it a bit strange that the central bank is being so aggressive,” said Callow.
This view was backed by an expert on the New Zealand economy, who said the Delta variant has the potential to derail the country’s COVID-19 response.
“Maybe New Zealand has just been lucky so far and if indeed there is an outbreak there will be a bloodbath since the markets have priced in the rate hikes and there is no chance the RBNZ can be aggressive with the tightening,” the source said.
However, ANZ’s Robinson said that New Zealand’s strong domestic economy makes a tighter monetary policy logical.
“The domestic economy is so strong at the moment that it is in danger of overheating and higher interest rates are needed quite soon to get ahead of that,” he said.
Capital.com has contacted the RBNZ for comment.
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