New Zealand Dollar Gains as CPI Data Boosts RBNZ Rate Hike Bets

Talking Points:

• New Zealand Dollar rallied against its peers after better-than-expected CPI data
• Government bond yields rallying showed RBNZ rate hike expectations building
• Markets price in at least one rate hike in the next 12 months, but not next month

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The New Zealand Dollar appreciated against its major counterparts after better than expected CPI data helped boost RBNZ rate hike expectations. In the fourth quarter, New Zealand consumer prices rose 1.3 percent y/y versus 1.2 percent expected and 0.4 percent in the third quarter. This marks the highest reading since June 2014. CPI increased 0.4% q/q versus 0.3% expected and 0.3% prior.

The data’s release was accompanied by surging New Zealand front-end government bond yields, hinting at a hawkish shift in the policy outlook. While the markets are not expecting the Reserve Bank of New Zealand to hike rates at its next meeting on February 9th, they are pricing in at least one over the next 12 months.

At its meeting on November 10th, the RBNZ reduced its main lending rate by 25 basis points to 1.75 percent. It left the markets with a view that current policy will deliver strong-enough growth to have inflation settle near the middle of the target range and that its efforts might need to be adjusted accordingly. The next interest rate decision may reveal whether or not this data was sufficient to nudge officials out of this passive posture.