The Reserve Bank of New Zealand raised interest rates by 25 basis points, as expected, to the highest in more than 14 years at 5.5%, and its policy statement forecast that the rate would prevail until June 2024 – unchanged from the earlier forecast.
“The 25 points were expected, but the big surprise was leaving the OCR forecast unchanged,” said Imre Speizer, head Of NZ strategy at Westpac.
“It says they’re done (hiking) and the language in it kind of hints they’re done. So that is a major surprise.”
The New Zealand dollar skidded to near three weeks low of US$0.61700 after the decision. It was last down 1% at US$0.61865. The Australian dollar fell 0.24% to US$0.659.
Meanwhile, the impasse in Washington over the debt ceiling negotiation has helped lift the dollar, even though it could lead to a default and push the country into recession, as investors reckoned that could spell worse trouble for the global economy.
The dollar index, which measures the US currency against six key rivals, was 103.46 in Asian hours, just under the 103.65 two-month peak it touched overnight. The index is up roughly 2% in May.
Treasury Secretary Janet Yellen has warned that the federal government could no longer have enough money to pay all its bills as soon as June 1, raising the risk of a damaging default.
Investors largely shunned riskier investments as another round of talks between the White House and the Republicans to raise the borrowing limit ended on Tuesday with no sign of progress.
“Progress on a deal is proving difficult and market jitters are increasing,” said Harry Ottley, an economist at Commonwealth
Bank of Australia.
Elsewhere, the yen strengthened 0.14% to 138.37 per dollar, having touched a six-month low of 138.91 overnight, while sterling was last trading at US$1.2424, up 0.11% on the day.
Hawkish rhetoric from Federal Reserve officials has also buoyed the dollar, with traders anticipating interest rates to stay elevated for longer.
Markets are pricing in a 27% chance of a 25 basis point hike in June, CME FedWatch tool showed, after the Fed’s quarter-point increase earlier this month.
Investors will get more clues on policy from the minutes of the Fed’s May meeting, due later in the global day.
“We suspect the base case among the leadership of the committee is that the tightening cycle is probably over,” said Kevin Cummins, chief economist at NatWest Markets.
“Recent rhetoric from a few officials seem interested in the additional hike(s), and this sentiment may well have been reflected in the tone of the minutes.”