RBNZ Interest Rate Decision Preview: Hawkish guidance yet again?

• The Reserve Bank of New Zealand is set to announce a 25 bps OCR hike in March.
• Eyes on the language in the statement amid no updated forecasts and Governor Orr’s presser.
• RBNZ’s hawkish guidance is likely to strengthen NZD/USD’s bullish momentum.

The Reserve Bank of New Zealand (RBNZ) stuck to its hawkish stance in the February meeting but Governor Adrian Orr did warn about potential recession risks. The inflation level, however, remains elevated, prompting the central bank to deliver another rate increase in March but at a slower pace.

RBNZ’s outlook on rate hikes holds the key

On Wednesday, the Reserve Bank of New Zealand will likely hike the key Official Cash Rate (OCR) by 25 basis points (bps) from 4.75% to 5.00%, continuing its rate hike trajectory for the second time this year. The policy announcement will neither be accompanied by the updated economic projections nor followed by a press conference by RBNZ Governor Adrian Orr.

The expected slowdown in the pace of tightening by the RBNZ could be attributed to the mixed domestic economic performance and the recent turmoil in the global financial sector. New Zealand’s Gross Domestic Product (GDP) fell 0.6% in the last three months of 2022, after a 1.7% rise in the September 2022 quarter. The drop at the close of the year was larger than the markets had predicted.

The country’s Consumer Price Index (CPI) inflation grew an annualized 7.2% in the three months to December, remaining steady from the prior quarter and slightly beating expectations of 7.1%. Meanwhile, the latest Quarterly Survey of Business Opinion (QSBO) from the New Zealand Institute of Economic Research (NZIER) “showed some positive developments, with both business confidence and firms’ own trading activity recovering slightly from the weak level seen in the December quarter.”

Against this backdrop, the tightening of global lending conditions remains a key cause for concern, as its impact on New Zealand’s economy still remains unclear. Therefore, the RBNZ could take a conservative approach and deliver a quarter percentage point rate hike on Wednesday.

With a 25 bps rate hike almost a done deal, traders will closely scrutinize any tweaks in the language of the statement for fresh hints on the RBNZ’s rate hike path. The latest Reuters poll of economists suggested there is a split among economists as to whether another 25 bps hike will occur in May. The RBNZ dated Overnight Index Swaps (OIS) currently prices a terminal rate of 5.27% in July.

Trading NZD/USD with Reserve Bank of New Zealand decision

In case the Reserve Bank of New Zealand hikes rates by 25 bps and keeps up its hawkish tone, suggesting that there is a potential need for further rate hikes to achieve its 1-3% inflation target, the NZD/USD pair is likely to receive an additional boost in its ongoing uptrend.

On a surprise 50 bps rate hike (personally, I see a slim chance), the Kiwi is likely to accelerate its bullish momentum to challenge the 0.6400 mark.

The Kiwi could change course and initiate a fresh downtrend should the central bank incorporate dovish tweaks in the policy statement, in the face of growing economic risks. If the central bank signals a likely pause in the May meeting, it will smash the New Zealand Dollar toward 0.6150.

The NZD/USD reaction to the RBNZ policy announcement could also be influenced by the broader market sentiment and the US Dollar price action.