RBNZ Maintains 2014 Rate Hike Outlook, Kiwi Rallies

DailyFX

Talking Points:

  • RBNZ maintains its 2014 rate hike outlook
  • RBNZ says a higher exchange rate provides flexibility on when to raise rates
  • NZD/USD erases FOMC losses

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The Kiwi rallied against the US Dollar and erased earlier FOMC led losses on the RBNZ’s announcement that it still expects to raise the target interest rate in 2014, despite a high exchange rate.

The Reserve Bank of New Zealand decided on Wednesday to keep the target interest rate at 2.5%, as was expected. Although the comments about a rate hike next year were the same as September, there may have been expectations for the central bank to tame hawkish talk because of the higher Kiwi exchange rate.

The RBNZ has consistently mentioned high house price inflation as the reason to raise the target cash rate, as the momentum in the housing market and construction sector is raising both demand and inflation pressures. The central bank is now waiting to see the effect of restrictions on high loan-to-value mortgage lending before raising interest rates to slow house price inflation, as was mentioned in a recent letter from Governor Wheeler.

The New Zealand Dollar has risen 500 pips against the US Dollar over the past two months, and the RBNZ said the higher exchange rate should lower inflationary pressure and provide the central bank with greater flexibility to the timing and magnitude of future rate increases. That language is less dovish than the possible previous expectation for the RBNZ to directly mention the Kiwi exchange as a reason to delay a rate increase.

The central bank said the economy is estimated to have grown by more than 3% from the start of the year to September and headline inflation will likely rise towards the target 2% rate. The RBNZ has kept the target cash rate at 2.5% since March 2011.

The New Zealand Dollar rose past 0.8275 following the release of the RBNZ statement. NZD/USD may continue to see support by 0.8200, while a previous high at 84.35 may provide resistance.

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NZD/USD 1-Minute: October 30, 2013

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RBNZ_Maintains_2014_Rate_Hike_Outlook_Kiwi_Rallies_body_Picture_1.png, RBNZ Maintains 2014 Rate Hike Outlook, Kiwi Rallies

Chart created by Benjamin Spier using Marketscope 2.0

-- Written by Benjamin Spier, DailyFX Research. Feedback can be sent to bbspier@fxcm.com .

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.
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