RBNZ Interest Rate Decision Preview: A 50 bps hike could rescue Kiwi bulls

• The Reserve Bank of New Zealand is seen raising OCR by 50 bps to 4.75% in February.
• RBNZ’s peak rate forecast and Governor Adrian Orr’s press conference hold the key.
• NZD/USD could rise if the RBNZ looks past the Cyclone Gabrielle-led damage.

“The Reserve Bank of New Zealand (RBNZ) has a responsibility to address inflation”, New Zealand (NZ) Deputy Prime Minister and Finance Minister Grant Robertson said on Monday. And that’s exactly what Governor Adrian Orr is expected to deliver this Wednesday at 01:00 GMT.

Eyes on RBNZ updated forecasts, language in the statement

The Reserve Bank of New Zealand is preparing to raise the key Official Cash Rate (OCR) by 50 bps from 4.25% to 4.75% when the board gathers on February 22 for its first policy meeting of 2023. The policy announcement will be accompanied by the updated economic projections while a press conference with RBNZ Governor Adrian Orr will follow at 02:00 GMT.

In November, the Kiwi central bank announced its first super-sized 75 bps rate hike after five consecutive 50 bps increases.

Although a 50 bps rate hike this month seems a done deal, it may not be an easy call for the RBNZ, as it needs to stay committed to tame inflation, in the face of the expected damage to New Zealand's economy from Cyclone Gabrielle and harsh weather conditions over the past three weeks.

New Zealand’s Consumer Price Index (CPI) for the final three months of last year held steady at 7.1%, optimistically short of the Reserve Bank's November forecast of a 7.5% annual rate, signaling peak inflation. Thus, a 50 bps rate hike for February is well justified but the bank has a long way to go before it could wind up its current tightening cycle.

Now that the country’s Prime Minister (PM), Chris Hipkins, announced an emergency NZ$300 million ($187.08 million) cyclone relief package on Monday, calling cyclone Gabrielle New Zealand's biggest natural disaster this century. The RBNZ has leeway to deliver a hawkish message.

The RBNZ will remain wary of relenting too soon, probably hinting at another 100 basis points or so over the next few months. The central bank’s projection for the peak rate could hold the key, with markets expecting the RBNZ to downgrade the outlook for interest rate rises, in light of the severe weather shocks. As a result, the terminal rate forecast could be lowered from 5.50% to 5.0%.

Trading NZD/USD with Reserve Bank of New Zealand decision

In a case where the Reserve Bank of New Zealand shifts its language in the statement toward a dovish tone while revising down the peak rate forecasts, the NZD/USD pair could revisit six-week lows near 0.6190.

On a surprise 25 bps rate hike, the Kiwi is likely to accelerate its bearish momentum, targetting the 0.6100 round figure.

In contrast, with a 50 bps rate hike accompanied by a strong hawkish message and the RBNZ sticking to its 5.50% peak rate projection, NZD/USD could resume its recovery toward the 0.6350 level.

Any reaction to the RBNZ policy announcement could be soon reversed, as the dust settles and investors reposition ahead of the Minutes of the US Federal Reserve (Fed) February meeting