The Kiwi Dollar Drops as a Dovish Rate Hike

The RBNZ announced its biggest interest rate hike in 22 years, but the New Zealand dollar exchange rate fell instead.

New Zealand's central bank (Reserve Bank of New Zealand/RBNZ) this morning raised the OCR interest rate by 50 basis points from 1.00 percent to 1.50 percent in a surprise. This is the biggest RBNZ interest rate hike in the last 22 years, but the New Zealand dollar exchange rate is falling on the forex market.

When the news was written in the last half of the Asian session (13/April), NZD/USD was down around 0.4 percent around 0.6820. The Kiwi dollar has also been lame versus its neighbors, with the AUD/NZD position rocketing nearly 0.5 percent to its highest range since March 2021.

NZD/USD Daily chart via TradingView

At a policy meeting today, the RBNZ confirmed last month's forecast of a potential rate hike of more than 3 percent by the end of next year. The increase in interest rates is necessary because inflation expectations remain high. However, the market has been pricing it since last month's RBNZ meeting.

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It is as if the RBNZ's move simply changed the rate hike from "in installments" to "lump sum" in the short term. In fact, ahead of today's RBNZ meeting, market players have even begun to take into account inflation expectations and a much higher rate of increase in interest rates for a longer time frame.

"While the RBNZ's decision aligns with current market calculations, it emphasizes an important difference in the long-term OCR outlook," said Michael Gordon, economist at Westpac, "In recent weeks, financial markets have been pushing for increasingly higher peak OCR calculations for this cycle (until the end of next year -ed), now at 4%. In contrast, the RBNZ views today's decision as a 'get things done sooner rather than later' approach."
"This looks like a dovish 50 basis point rate hike," said Jason Wong, senior market strategist at BNZ, "They are only pushing ahead with the hike and the RBNZ hasn't really changed its view from its February statement on the OCR outlook."

Other comdoll counterparts perform relatively better. AUD/USD is steady around the 0.7450s; maintaining its position near multi-month highs even though it had weakened in a row throughout last week. Meanwhile, USD/CAD stepped down from a record high in a year, as market players expect the Canadian central bank (BoC) to announce an interest rate increase of 50 basis points later tonight.