RBNZ: More rate hikes likely, Governor Breman indicates

What happened

Reserve Bank of New Zealand (RBNZ) Governor Anna Breman indicated that the central bank will likely deliver further interest rate hikes at upcoming meetings, with the possibility of monetary policy entering restrictive territory. This guidance partly reversed the dovish read that markets had taken from the bank's decision to hold the official cash rate at 2.75% hours earlier. Breman explicitly stated that the committee agreed tighter policy is likely to be required, conditional on the economy's evolution.

Why it matters

Breman's signaling suggests the RBNZ may be more inclined to continue its monetary tightening cycle than markets had anticipated. A key concern was the depreciation of the New Zealand dollar (NZD) and its potential to fuel imported inflation. The NZD has been falling, and rising oil prices, particularly amidst geopolitical tensions, could push inflation towards 4.4%, making a December hike more probable. Furthermore, wage growth remains below levels deemed consistent with the RBNZ's 2% inflation target.

Market impact

Interest rates and bonds: The prospect of further rate hikes is likely to push front-end yields higher, as investors price in a more prolonged or aggressive tightening cycle. Market pricing for a December hike is expected to be revised upwards. Dollar and currency: The New Zealand dollar (NZD) may find support, as the possibility of further monetary tightening makes the currency more attractive. Breman's comments could help the kiwi recover some recent losses. The policy gap with the Reserve Bank of Australia (RBA) may narrow, potentially capping AUD/NZD. Equities: The impact on equities is mixed. On one hand, the prospect of higher rates could weigh on risk assets. On the other, concerns about corrections in AI-related assets were mentioned, indicating an RBNZ focus on financial stability risks. The New Zealand market might react with caution. Commodities: Oil is a key swing factor. Higher crude prices, especially if geopolitical conflicts escalate, could boost inflation and reinforce the need for rate hikes, potentially dampening risk appetite globally. Brazil: Direct impact is limited, but increased global risk aversion or a stronger dollar at the expense of emerging market currencies could affect capital flows and exchange rates. The RBNZ's monetary policy has little direct influence on Brazil's Copom or Selic rates.

What to watch

Partial inflation indicators and labor market data in the coming weeks will be crucial for the RBNZ's assessment. The next policy decision, due with the December Monetary Policy Statement, will include updated forecasts and a new projected path for the Official Cash Rate (OCR).

Scenarios

Base Case: The RBNZ delivers another rate hike in December, driven by imported inflation concerns and the need to curb NZD depreciation. The policy rate may move beyond its previously projected path. Risk Case: Inflation moderates and the NZD stabilizes, allowing the RBNZ to pause its tightening cycle, focusing instead on assessing the effects of past hikes and financial stability risks. The decision to hold rates in October was based on the view that recent hikes provided time to evaluate their impact.

Original source: ForexLive (InvestingLive). For information only, not investment advice.