New Zealand Takes The Lead On Rate Hikes

March 15, 2014 in Forex Fundamentals and News

Earlier this week, New Zealand took the first step towards a more hawkish interest rate regime.

The country lifted its OCR to 2.75% and indicated that three or four more similar hikes could follow.

Analysts are divided on the timing of these rate hikes, but most agree on April, June and July. It may be noted that New Zealand gets credit for being the first amongst the developed countries to bite the bullet on hardening interest rates.

Rationale

Here are some key bullets from the statement issued by Reserve Bank Governor Graeme Wheeler justifying the decision, along with relevant charts:

  • New Zealand’s economic expansion has considerable momentum, and growth is becoming more broad-based. GDP is estimated to have grown by 3.3 percent in the year to March.
  • Domestically, the extended period of low interest rates and continued strong growth in construction sector activity have supported recovery.

gdp

  • Prices for New Zealand’s export commodities remain very high, and especially for dairy.
  • A rapid increase in net immigration over the past 18 months has also boosted housing and consumer demand.
  • Confidence is very high among consumers and businesses, and hiring and investment intentions continue to increase.
  • The high exchange rate remains a headwind to the tradables sector. The Bank does not believe the current level of the exchange rate is sustainable in the long run.

exchange rate

  • While headline inflation has been moderate, inflationary pressures are increasing and are expected to continue doing so over the next two years.

Inflation

Inflation is a key driver for the rate hike decision.

“By increasing the OCR as needed to keep future average inflation near the 2 percent target mid-point, the Bank is seeking to ensure that the economic expansion can be sustained,” said the Governor in the statement.

NZDUSD Technicals

nzdusddaily-close140314

On the daily chart above we note that a striking rounding pattern has developed over the past few months.

This is a bullish pattern, and after the RBNZ announcement, price broke momentarily above the rim of the saucer (the red horizontal line), but pulled back thereafter.

The stance is nevertheless very bullish.

 

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