‘Peak’ OCR: NZ dollar, interest rates drop after crazy day on markets

The New Zealand dollar and wholesale interest rates fell sharply after the Reserve Bank of New Zealand (RBNZ) surprised the market with an unexpectedly “dovish” monetary policy statement.

As expected by most, the bank raised its Official Cash Rate (OCR) by 25 basis points to 5.50 per cent, but the bank surprised nearly everyone by saying that would be the peak.

In contrast, market expectations were set on 5.75 per cent being the peak, with some suggesting 6 per cent would be the high point.

Soon after the 2pm release, the NZ dollar began to dive sharply, as did interest rates, suggesting the market was heavily positioned for more rate hikes further down the track.

Near the end of the trading day, the kiwi was down by 80 pips at US61.70c and wholesale interest rates were sharply lower.

The two-year swap rate, which has an influence on mortgage rates, dropped by 30 basis points at 5.21 per cent while 10-year swaps were down 13 basis points at 4.40 per cent.

The RBNZ’s OCR forecast is practically identical to that in the February statement.

As before, cuts have been pencilled in for the second half of 2024.

“It’s crazy, as you would expect,” Westpac senior market strategist Imre Speizer said.

“It’s a very dovish surprise in the OCR track. The 25 basis point hike was not a surprise – that was fine.

“It was the retention of the 5.5 per cent forecast peak.

“In other words, they are signalling that they have completed the cycle. It’s over. And that was a major surprise for the market, as most had expected more rate hikes to come,” Speizer said.

Harbour Asset Management’s fixed income strategist Hamish Pepper said the RBNZ had caught the market off-guard, and in no small way.

He agreed it looked like the RBNZ was done for now.

In the past, RBNZ Governor Adrian Orr has described past moves as “watch, worry and wait”.

“We have finally reached the point where they can watch, worry and wait.

“We were never quite sure as to what level was associated with that, but it happens that 5.5 per cent is it.”

What happens from now on would depend on the data.

“From our point of view, the data is going to tell us that monetary policy is doing its job.”

“The economy is slowing, the labour market is loosening and inflation is declining.”

Harbour expects to see OCR cuts towards the end of this year or early next year.

Pepper said it was easy to forget monetary policy had come a long way in a short space of time - 525 basis points worth of hikes in a year and a half.