Central Banks Raise Interest Rates, NZD/USD Soars

New Zealand's central bank (RBNZ) revised its forecast for the peak benchmark interest rate from 2.6 percent to 3.35 percent. NZD/USD and AUD/NZD suddenly became turbulent.

The New Zealand dollar jumped more than 0.6 percent to the 0.6770 range against the US dollar in today's Asian trading session (23/February), despite worsening global market sentiment due to the escalation of the Ukraine crisis. The New Zealand central bank (RBNZ) announced further interest rate hikes in line with market expectations, as well as announcing a more aggressive future monetary policy tightening than previously forecast.

NZD/USD Daily chart via TradingView

The RBNZ this morning announced an increase in interest rates by 25 basis points to a level of 1.0% in order to tackle the increase in the inflation rate, while also disclosing that it would start selling its collection of bonds at a scale of NZD5 billion per year. The RBNZ also revised its peak projection for the benchmark interest rate (Official Cash Rate/OCR) to 3.35% from the previous 2.6%.

The duet of "rate hike" plus "quantitative tightening" from the RBNZ was beyond market expectations, so it was successful in boosting the New Zealand dollar exchange rate. In addition to NZD/USD which bounced up, AUD/NZD also slumped to a two-week low.

"The biggest surprise was the extent of the projected OCR increase - even higher than our top market forecast of 3%," said Michael Gordon of Westpac, as reported by Reuters, "We continue to expect a string of 25 basis point rate hikes in recent meetings. future policy. However, given how much of a task the RBNZ believes it has to carry, a 50 basis point hike could come at any meeting.”

Market participants currently expect the RBNZ interest rate to reach 2.5% by the end of 2022, up from the previous estimate of 2.25%. The 2-year swap rate also increased by 12 basis points to 2,695%, setting a record high since early 2016.