RBNZ policy further away from RBA

RBNZ is expected to hike by 75bps, further drawing its monetary policy away from Australia's in a historic shift.

Going "triple" for the first time ever?

The most recent survey of economists by Reuters shows that 65% think that the RBNZ will do a "triple" rate hike when it meets for the first time in history. The remnant expects a 50bps hike in line with the last three meetings. Typically, policies between the RBA and the RBNZ follow a similar pattern, but they could be facing different scenarios.

The RBA has returned to more traditional quarter-point hikes after surprising investors back in September. The reason given included concerns over liquidity in the bond market. Australia, of course, is a major exporter of raw materials to China, and although volumes have remained up, prices have not. Particularly considering China's problems in the housing sector. Meanwhile, New Zealand has been facing housing price inflation which has finally reversed in a sign that the RBNZ in the past has said is good.

Beyond the next meeting

Kiwi inflation is galloping ahead, but not at the same rate as faced by other central banks in Europe or the US. Nevertheless, the market appears to be expecting the central bank to pull out all the stops to bring it back down to target. With unemployment remaining low, the RBNZ has room to be more aggressive, especially if we consider that none of the members have expressed concerns about liquidity so far.

The focus is on any hint, such as if the governor is explicit about the 75bps being a one-off or tips that rates will start to normalise. On the other hand, a 50bps hike with strong hawkish language about hiking further in December might still have a similar effect on the markets. The median expectation is for rates to top out at 5.00% in the middle of next year. The point of contention is just how fast that will happen.

Kiwi prepares for a breakout

Kiwi appears to form a sideways rectangle top pattern, with a double bottom at $0.6065 expected to send prices to $0.6379 should the top at $0.6204 break. Before there, $0.6250 is a significant resistance to breach and might offer a pullback if not a reversal and a target failure. If bulls strengthen, the August peak at $0.6470 might be revisited.

Losing the short-term floor might send prices down to the $0.60 stronghold, a penetration of which brings $0.5840 in focus. The failure to hold $0.5810 will expose the previous low at $0.5510, however.

Key takeaways

Most analysts expect the RBNZ to raise interest rates by 75bps at its next meeting, the first time it would do a "triple" rate hike. This is a historic shift away from Australia's monetary policy but in response to unemployment remaining low and no concerns about liquidity. The market appears to be expecting the central bank to pull out all the stops to bring inflation back down to target as Kiwis have been facing housing price inflation which has finally reversed. The focus is on any hint from the governor on whether he is explicit about the 75bps being a one-off or tips that rates will start to normalise.