The New Zealand dollar is calm in the Tuesday session, ahead of the RBNZ policy decision. NZD/USD is currently trading at 0.6963, down 0.10% on the day. The currency has been on an impressive upturn, rising two full cents since Thursday.
RBNZ expected to hike rates
Just a few months ago, the Reserve Bank of New Zealand was talking openly about raising interest rates as Covid was completely contained and the economic recovery was in full swing. Fast forward as the Delta variant managed to get past the country’s strict border controls, causing the central bank to screech on the brakes and delay plans for a rate hike. Although Delta is yet to be contained and Auckland remains under lockdown, the RBNZ is widely expected to raise rates from the ultra-low 0.25% to 0.50% at the Wednesday policy meeting.
The RBNZ will lose bragging rights as the first major central bank to raise rates in the Covid era – Norway claimed that honor just two weeks ago. Still, if RBNZ pulls the rate trigger upwards, it will mark the bank’s first rate hike since 2014. The case for a rate hike is compelling – GDP jumped 2.8% in the second quarter and inflation is running at 3.3%, above the central bank’s upper level of its target of 1-3%.
With the RBNZ poised to raise rates, the question of the day is whether the New Zealand dollar will rise in response. True, the financial markets have priced in a rate hike, but given the sheer magnitude of such a move, I would be surprised if a hike did not provide a lift to the currency. This hike is expected to be the first of several, which should make the New Zealand dollar more attractive to investors.