RBNZ Expected to Hike Again, but Dovish Risks Could Cap NZD Gains – ING

The Reserve Bank of New Zealand (RBNZ) is widely expected to raise its official cash rate (OCR) at its upcoming meeting, but analysts at ING warn that dovish risks surrounding the decision could limit any sustained strength in the New Zealand Dollar (NZD).

What to Expect from the RBNZ Meeting

As of the latest market pricing, a 25-basis-point hike is fully priced in for the RBNZ’s meeting scheduled for [Date of meeting if known, otherwise: next week]. This would bring the OCR to [Current rate + 0.25%]%. However, ING’s note highlights that the central bank’s forward guidance and economic projections will be crucial in determining the NZD’s trajectory.

The RBNZ has been one of the more aggressive central banks in the developed world, having already raised rates several times this cycle to combat inflation. Yet, recent domestic data has shown signs of cooling, with GDP contracting in the second quarter and inflation pressures beginning to ease. This has led some analysts to speculate that the RBNZ may be nearing the end of its tightening cycle.

Dovish Risks and Their Impact on the NZD

ING points out that the risks are tilted towards a more dovish outcome, which could weigh on the NZD. If the RBNZ signals that this hike could be the last for a while, or if it downgrades its growth forecasts, the currency could come under pressure. Conversely, a hawkish surprise, such as signaling further hikes, could provide a temporary boost to the NZD.

The New Zealand Dollar has been sensitive to shifts in global risk sentiment and interest rate differentials. A less hawkish RBNZ could reduce the appeal of NZD-denominated assets, especially as other central banks, like the Federal Reserve, are also adjusting their policies.

Why This Matters for Traders and Investors

For forex traders, the RBNZ decision is a key event that can drive volatility in the NZD pairs. Understanding the central bank’s stance is crucial for positioning. For businesses and individuals with exposure to New Zealand, the interest rate outlook influences borrowing costs and economic activity. A pause in hikes could signal that the peak rate is near, affecting mortgage rates and business loans.

Conclusion

In summary, while a rate hike from the RBNZ appears almost certain, the accompanying statement and projections will be the real market movers. ING’s assessment of dovish risks suggests that the NZD’s upside may be limited. As always, traders should prepare for potential volatility and consider both the immediate reaction and the longer-term policy path.

FAQs

Q1: When is the RBNZ’s next policy meeting?
The RBNZ’s next policy meeting is scheduled for [Date if known, otherwise: late October 2023]. The decision will be announced at 2:00 PM NZST.

Q2: What is the current OCR?
The current Official Cash Rate is [Current rate]%, following the last hike in [Month Year]. A 25bp hike would bring it to [New rate]%.

Q3: How could a dovish RBNZ affect the NZD/USD pair?
If the RBNZ signals a pause or end to its tightening cycle, the NZD could weaken against the USD, potentially testing lower support levels. Conversely, a hawkish surprise could push the pair higher.