At the April 4 meeting the RBNZ decided to surprise the market with a 50 bps rate hike, compared to the overwhelming expectations for a smaller 25 bps move. On May 24, the RBNZ is hosting its third rate-setting meeting for 2023. The market appears to have learnt its lesson as it is currently almost evenly split, pricing in a 51%-49% probability of a 25 bps and a 50 bps move respectively. It is rare for the market not to have a clear view on a central bank meeting, which potentially opens the door to a decent market reaction on Wednesday morning.

This split market-pricing successfully captures the dilemma faced by the RBNZ. On one side, Orr et al see that global growth is showing signs of weakness and domestic inflation expectations are moderating. On the other hand, the labour market is tightening, migration is firming up, business surveys continue to recover and the CPI remains elevated despite the weaker print for the first quarter of 2023. In addition, the recent budget statement showed increased optimism from the government with the finance minister taking back his earlier comment about New Zealand potentially experiencing a recession soon.

They appear determined to get inflation under control. They announced a stronger rate move at the April 4 meeting, despite the negative banking sector developments elsewhere. They seem to understand that they can implement an aggressive monetary policy strategy now that the conditions justify it.

Opting for a lower rate hike and hoping that a more measured approach will not crash their economy might be the best strategy from a medium-term perspective. And this was highlighted at the last meeting’s minutes where they commented that “tightening monetary policy now to reduce inflation improves the outlook for financial stability by limiting the need for even higher interest rates in future”.

On the other side, all the above could also be achieved with a 25bps rate hike and by keeping the door wide open for further rate hikes. Hence, the RBNZ could opt for the smaller rate increase and use the time until the July 12 meeting to further evaluate the domestic and global developments, especially as the US nears an unprecedented default. The market expects a total of 66 bps of rate hikes until the October 2023 meeting, with a rate cutting cycle seen afterwards.

The kiwi had an interesting session on April 4 after the surprising rate announcement. It recorded good gains against both the aussie and US dollar, but this did not translate in the start of a new rally especially against the latter. As such, the kiwi/dollar pair continues to hover inside the wide 0.6083-0.6389 range.

If the RBNZ chooses to surprise again and announces another 50 bps rate move, kiwi bulls would probably retest the April 5, 2022 downward sloping trendline and the rectangle’s upper boundary at 0.6389. An upside breakout would be technically significant provided that kiwi/dollar records at least two daily closes that are comfortably above the 0.6389 level.

Should the RBNZ appear less adventurous and confirm the 25 bps rate move expectations, the market reaction would be more muted and we could potentially see some kiwi underperformance. This underperformance would be more protracted if the RBNZ does not hike at all, even if the accompanying rhetoric remains hawkish. In this case, the kiwi/dollar pair would potentially see a dip to 0.6150 and, more likely, towards the busier 0.6060-0.6092 range, the lower boundary of the recent rectangle.