NZD/USD drops 0.50% in response to the decision of the Reserve Bank of New Zealand (RBNZ) to raise the key policy rate by 25bps to 0.75%. As NZ-US rate spread is set to correct further lower, economists at MUFG Bank expect the kiwi to remain under downside pressure.

RBNZ’s cautious hike 

“The new RBNZ guidance now has the key policy rate at 2.10% by December 2022, a year sooner than the last estimate. However, this is notably below what is currently priced into the financial markets.”

“The RBNZ is implying policy rate hikes of between 125-150bps by the end of next year and given New Zealand’s zero-COVID policy and the government today announcing the re-opening of borders from January there are high risks of further disruptions ahead.”

“The 15bps drop in the 2-year government bond yield today is understandable given what is priced into the rates market in New Zealand. The adjustment could have further to go over the short-term which could mean further NZD weakness versus the US dollar from here.”