Summary:- The RBNZ continues to tighten it monetary policy.
- The key lending rate was hiked for r the third time in a row to 3.25 basis points and comments indicate it will be raised again at the next meeting.
- The RBNZ is concerned about a robust economy as well as low home mortgage rate.
The Reserve Bank of New Zealand (RBNZ) raised its interest rates for the third time in a row yesterday. Judging by the very hawkish comments afterwards, we could see them raise rates the next time they meet as well.
Yesterday, the RBNZ raised its key lending rate 25 basis points from three percent to 3.25 percent. This was not a shock to the markets, as we had expected this move. However, we expected the bank to slow down its pace of monetary tightening, and judging by what we heard, that is not likely to happen. Policy makers indicated, strongly, that further rate increases were needed to curb the accelerating and robust economy in New Zealand. They are focusing on mortgage rates as there is a lot of competition here which has pushed rates lower. The bank is not happy here as they see a housing bubble risk. If they raise rates again in July, that would be four times in a row.
New Zealand is the only developed country whose bank is raising rates at this time. Last week we saw the European Central Bank (ECB) cut its key rate to a record low of 0.15 percent and slash its deposit rate into negative territory. The Bank of Japan (BOJ) continues to inject money into its economy to combat deflation and stagnant growth. Meanwhile, the U.S. Federal Reserve (Fed) is reducing its massive quantitative easing program as it keeps its key rate near zero as well. However, some Asian and Pacific Rim economies are faring better and raising rates.
Consumer prices, for New Zealand, was up 1.5 percent annually, for Q1 ending March 31. This is down from the Q4 reading of 1.6 percent to close out 2013. Other data is indicating strong economic growth in retail numbers as well as a rise in building orders, for housing. However, we are seeing housing prices slow down.
We could see the RBNZ hike rates 125 basis points this year with the key lending rate be at 5.25 percent by the beginning of 2016. Thanks to this, we could also see the New Zealand dollar (Kiwi) also appreciate. The Kiwi was up to its highest level in three weeks near $0.8641 after the announcement. The EUR/NZD also lost ground and is trading at 1.5651. Please see the below chart.
We are seeing investors run to high yields as well as comments made by the RBNZ will need to normalize rates or bring them to a more neutral level. This strengthens investor belief the bank will continue to tighten monetary policy. As this happens look for the Kiwi to make nice gains against the U.S. Dollar but even better gains versus the euro, yen, Ausrtalian Dollar and Canadian Loonie. The Kiwi, for now is an outperformer in the short term.