Volkmar Baur at Commerzbank expects the Reserve Bank of New Zealand (RBNZ) to raise rates at its July meeting to reinforce its inflation-fighting credentials, which should initially support the New Zealand Dollar (NZD). However, he argues that current market pricing of about 3.5 hikes over 12 months is excessive, and the eventual repricing of this path is likely to weigh on the kiwi.

Near term support, medium term drag

"Tomorrow morning, the Reserve Bank of New Zealand will meet to decide on its policy rate. At the last meeting in May, the decision was extremely close. The six members were divided, and since three voted in favor of raising rates and three voted against it, Governor Breman’s vote ultimately proved decisive in keeping the policy rate unchanged."

"While leading indicators suggest that inflation should now start to fall again as oil prices have dropped, it is unclear how quickly this will happen. We therefore expect the RBNZ to raise interest rates tomorrow. If only to send a clear signal that it intends to combat inflation and is firmly focused on its inflation target."

"The market has already priced in this move at a 70% probability. This should provide some support for the kiwi. However, what the central bank has to say about the coming months is likely to become a key focus for the currency once again."

"As of today, the market is pricing in about 3.5 rate hikes over the next 12 months. Given these expectations, it will likely be difficult for the RBNZ to surprise the market with a hawkish stance. However, the RBNZ is also likely to keep the door open for further rate hikes, depending on how inflation develops in the coming months. It will therefore depend on how strongly the central bank signals the possibility of another hike."

"We could certainly imagine that inflation might prove somewhat stubborn in the coming months, which could then necessitate another rate hike. However, we consider the market expectation of 3.5 hikes over the next 12 months to be excessive. Consequently, the pricing out of these hikes in the coming months is likely to weigh on the kiwi."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)