RBNZ: Feeling the Pressure

My spies in New Zealand just sent me a message on my Blackberry, saying that it looks as if the RBNZ will be raising its benchmark rate by 25 basis points, bringing it up to 2.75%. The cash rate had been sitting at 2.50% for the past year as the central bank kept rates at low levels in order to stimulate the economy.

Some analysts say it’s about time that the RBNZ did some tightening. After all, the RBA had already hiked its rate six times before taking a break. Meanwhile, strong economic figures and rising inflation in Canada forced the BOC to do the same. Let’s take a look at recent data to see whether or not a rate hike is really warranted.

Last month, RBNZ Governor Alan Bollard stated that the market’s prediction that they would hike the benchmark interest rate to 2.75% was very much warranted. In Bollard’s words, it was “broadly in line with our views.”

More than Bollard’s statement, the market’s expectation for a rate hike was supported by the unexpected improvement in New Zealand’s labor market during the first quarter of this year. Specifically, the number of people employed increased by 1.0%, more than three times the 0.3% rise initially expected.

On top of that, New Zealand’s exports, particularly milk products, have been climbing despite the surge in commodity prices. In fact, New Zealand’s most recent trade balance revealed the first annual surplus in more than seven years! China was the main culprit, as its purchases rose around 40% since January.

A rate hike from the RBNZ may be just what the Kiwi needs to pull up from its recent sharp dive. Recall that risk aversion, which resulted from the never-ending European debt woes, forced the NZDUSD to break one key support level after another. The pair is currently teetering around the psychological support at 0.6600 and the upcoming rate statement could determine whether it’ll bounce or break.

PoD Chart

Still, risk aversion could keep weighing the Kiwi down and any rally spurred by a rate hike may be short-lived. On the other hand, if the Alan Bollard and his men disappoint, the Kiwi could make a break for it and plummet until the next support level at 0.6200. After all, Bollard did promise they’d hike rates by the middle of the year, right? Stay tuned at 9:00 pm GMT tomorrow to find out if he’ll stick to his word.