RBNZ Surprises Market with 50 Basis Point Hike
NZDUSD jumps 1.1% as New Zealand's central bank defies expectations, maintaining its pace of tightening despite lower-than-anticipated economic activity in Q4 2022.
Asian stocks fall amid US bank health concerns, snapping Wall Street's winning streak.
RBNZ lifts cash rate by 50bps to 5.25%, defying market expectations.
Loretta Mester advocates for rates above 5% to quell inflation.
What’s happened in the markets?
Asian stocks declined on Tuesday, led by Japan, amid ongoing concerns over the health of US banks which put an end to Wall Street's four-day winning streak. Meanwhile, New Zealand shares also retreated, while US and European futures remained mixed. Hong Kong and China were closed for a holiday. The dollar weakened, and Treasuries dipped, while Brent continued to rally.
During its April meeting, the Reserve Bank of New Zealand (RBNZ) raised the official cash rate by 50 basis points to 5.25%, the highest since December 2008, marking the 11th consecutive rise and defying market expectations of a 25-basis point hike. This decision was made despite economic activity in Q4 2022 being lower than anticipated, with demand still outpacing supply capacity, particularly following recent weather events. The RBNZ anticipates a continued easing in domestic demand and a slowdown in core inflation and inflation expectations, which will determine the direction of future monetary policy. The central bank believes that there is no material conflict between lowering inflation and maintaining financial stability in New Zealand. The kiwi rose by as much as 1.1%
What to watch?
The Reserve Bank of Australia (RBA) kept its cash rate steady at 3.6% during its April meeting, marking the first pause in the central bank's hiking cycle since May 2022. The decision came amid efforts to account for policy lags, with the board adding it was ready to resume tightening should the economy need it. “The decision to hold interest rates steady this month provides the board with more time to assess the state of the economy and the outlook in an environment of considerable uncertainty,” Governor Philip Lowe said in a statement. He added that economic growth has slowed and is projected to be below trend over the next couple of years. The committee will be paying close attention to local and overseas data ahead of its next meeting just before the May budget.
Loretta Mester, the Cleveland Fed chief, said that rates should rise above 5% and remain there for some time to quell inflation. The exact level depends on how quickly price pressures ease, but for now, monetary policy needs to move "somewhat further into restrictive territory." The Fed will receive more labor stats on Tuesday, with the March ADP report expected to show private employers added 210,000 jobs, down from 242,000 a month earlier.