NZD/USD Slides After RBNZ Hike of 0.25%

 | May 24, 2023 06:22AM ET

  • RBNZ hikes by 0.25%, signals end of tightening cycle
  • New Zealand retail sales decline
  • NZD/USD slides by 1.8%

    • The New Zealand dollar is taking a bath on Wednesday. In the European session, NZD/USD is trading at 0.6136, down a massive 1.78% on the day. It’s looking like today will be one of the worst one-day performances from the New Zealand dollar this year.

    h2 RBNZ signals end of rate hikes/h2

    The Reserve Bank of New Zealand delivered a 25-basis point hike, bringing the cash rate to 5.5%, a 14-year high. The move was expected, yet the New Zealand dollar tanked after the decision. What happened to the kiwi?

    Today’s rate hike was not a surprise, although it is significant in being the smallest increase since February 2022. The central bank’s statement was dovish, noting that “inflation pressures are easing” and policymakers expect inflation to fall to the 1-3% target. Governor Orr left no doubt that this tightening cycle was over, saying, “all of the committee were comfortable with the forward path that had interest rates holding around 5.5%. This surprised the markets, which had expected the central bank to remain open to further hikes and sent the kiwi tumbling lower.

    The RBNZ is projecting that the economy will shrink in Q2 and Q3, which will help curb inflation. If inflation surprises to the upside in the coming months, I would not be surprised to see the central bank begin to trim rates.

    Overshadowed by the RBNZ’s rate decision was a disappointing retail sales for the first quarter, which added to the New Zealand dollar’s misery. Headline retail sales slipped 1.4%, following -0.6% in Q4 2022 and below the -0.6% estimate. Core retail sales came in at -1.1%, better than the Q4 reading of -1.6% but worse than the estimate of -0.6%. It was a second straight decline for both the headline and core figures, another signal that high-interest rates are taking a bite out of economic activity.