RBNZ: Hinting at a Rate Hike?

As everyone and his mother had expected, the Reserve Bank of New Zealand (RBNZ) decided to keep its official cash rate (OCR) at 2.50% and announced that it plans to do so throughout the year.

No surprises there, as all 11 economists that participated in a Bloomberg survey saw that coming. The big shocker, however, was that the rest of Governor Graeme Wheeler’s statement showed a hint of hawkishness, unlike the central bank’s past statements.

First, the RBNZ declared that it will eventually have to withdraw monetary stimulus. If these words sound familiar, it’s because the Fed has taken a similar stance.

Second, the central bank has noticeably changed the way it describes its local currency. It no longer referred to the New Zealand dollar as “overvalued.” This time around, it only described it as being “high,” which some believe is softer language from the RBNZ.

Last but not least, the RBNZ warned the markets about the sharp rise in house prices. CPI doesn’t really pose any threats, since it’s still at 0.7% — its lowest annual pace since 1999. But it’s a whole different story with house prices.

The cost of homes has risen 7.6% in June from a year earlier, marking the fastest pace of growth since 2008. Though a big portion of these gains took place in Auckland and Christchurch, the central bank fears that strong house price inflation may spill over to other areas in the country.

NZD/USD Chart

New language from the RBNZ gave the markets something to work with, and they used it to fuel an NZD/USD rally. As you can see, moments after the central bank delivered its hawkish message, the New Zealand dollar surged 50 pips against the Greenback.

All in all, the tone of the statement suggests that the RBNZ has shifted to a tightening bias. Economists and analysts predict that the RBNZ will begin hiking the OCR by the end Q1 2014 and then slowly increase it by around 2-3% in the years after. By 2016, the OCR is expected to hit 5.50%.

What does this mean for the Kiwi?

For now, it’s reasonable to expect traders to start pricing in their expectations for a rate hike. After all, Asia has already adjusted, and it’s only a matter of time before both Europe and the U.S. get in on the action. It might be too early to say that the Kiwi will rally to its highs this year, but I think it’s a good idea to at least have a bullish bias on the currency.