File image of Anna Breman. Copyright: Pound Sterling Live.
RBNZ puts a stop to declines with 'hawkish' commentary.
The GBP/NZD was all set to extend its multi-week rally through the course of this week, but the Reserve Bank of New Zealand (RBNZ) rudely interrupted that trend.
The New Zealand dollar advanced 0.80% against the pound on Wednesday and extended the advance Thursday as markets moved to price in as many as three RBNZ interest rate hikes this year.
This was after the central bank warned at its scheduled policy meeting that it was concerned about rising inflation, something its governor Anna Breman reiterated in an interview Thursday.
"If we do see that medium-term inflation starts picking up, then we will act decisively and that means rate hikes," said the Governor. "The balance of risks have shifted in terms of inflation, and there are more risks on the upside."
New Zealand's OIS market prices in more than a 90% chance of a rate hike by July. The year is now fully priced to witness three hikes.
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Secure Your Rate Before It Moves →"The post‑RBNZ impact was present again today, with another large sell‑off in the front end. Governor Breman added further to newly hawkish tones from the RBNZ, with a seeming emphasis on inflation over growth in an interview with Bloomberg today," says Michael Tang, analyst at Commonwealth Bank.
During Wednesday's scheduled RBNZ update, Breman said that policy makers agreed that a hike was not necessary this month, but the possibility of a hike was discussed, as was the case for a May hike.
The RBNZ left the OCR unchanged at 2.25% as widely expected, but the guidance has clearly shift in favour of further rate hikes, which is proving a decisively supportive development for the NZD.
GBP/NZD had been steadily rising but the central bank developments coincided with the 78.6% Fibonacci retracement of the 2026 rally, which turns this level into a clear technical resistance zone:
The developments now make further GBP/NZD gains less likely in the near term and we suspect some consolidation will now set in above the 50% fib level at 2.2927.
Regarding the outlook for inflation, there was an admission by the RBNZ that inflation would now sit above its target: "the Committee also assumes some near-term pass through into other consumers price inflation components, particularly transportation, airfares and food prices. These assumptions result in an inflation forecast of 3.0% in the March quarter and 4.2T in the June quarter."
The statement did, however, add some balance: "weak demand and spare productive capacity in the economy should constrain the degree to which higher costs can be passed on."
On medium-term inflation risks, the RBNZ statement was therefore open-ended, noting that "inflationary pressure will depend on the extent to which higher costs influence price- and wage-setting behaviour by firms and workers in the economy."
The inflationary risks evident in 2022 are therefore unlikely to repeat, but the central bank acknowledges it will have to do some lifting to be on the safe side. For the Kiwi dollar, that's proving helpful.
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