The New Zealand Fed Raises Interest Rates

The Federal Reserve Bank of New Zealand maintained the official cash rate at 0.25% in its resolution statement announced in the morning, but said it would stop the purchase of bonds under the Large-scale Asset Purchase Program (LSAP) before July 23. The statement also deleted the previous statement that it takes a lot of time and patience to achieve its inflation and employment targets.

The Reserve Bank of New Zealand pointed out that “commissioners agree that the main downside risks of deflation and high unemployment have faded. Since the end of 2020, economic conditions have been better than expected. The strength of the economy means that the current level of stimulus can be reduced.”

The Reserve Bank of New Zealand also stated in its meeting minutes, “Over time, due to rising domestic production pressure and labor shortages, more sustained consumer price inflation pressures are expected to develop over time. Nonetheless, costs are passed on. There is still uncertainty about the speed and magnitude of inflation in the medium term.”

The exchange rate of New Zealand dollar against the US dollar jumped instantly after the announcement of the hawkish Federal Reserve Bank of New Zealand resolution, breaking the 0.70. Throughout the Asian session, the New Zealand dollar rose across the board against all G10 currencies, with gains generally around 1%, because the Fed stopped buying bonds much earlier than most analysts expected. New Zealand’s two-year bond yields also soared by 9 basis points during the day, reaching this year’s high of 1.668%.

Although the Reserve Bank of New Zealand has not clearly provided its next interest rate hike schedule, traders have now begun to anticipate that the Fed may start the process of raising interest rates as early as next month.

Data from the interest rate futures market shows that investors have now fully digested the possibility of a rate hike in November, which is higher than the 82% before the Fed’s announcement. The probability of a rate hike in August has also risen to 76%. The two-year swap rate jumped to 0.96%, the highest level since February 2020.

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