NZ dollar briefly spikes after Reserve Bank drops hawkish hints

The NZ dollar briefly spiked after the Reserve Bank lifted its key interst rate to 3.5 per cent. Photo / File

The New Zealand dollar spiked higher despite the Reserve Bank keeping to the script and lifting its official cash rate (OCR) by 50 basis points to 3.5 per cent at its monetary policy review.

The currency at one point hit US58c - up about 70 basis points from its level just before the 2pm release, and A88.9c from A88.30c against the Aussie.

In interest rates, the influential two-year swap rate - which has an influence over home mortgage rates - firmed a few basis points also, but by late afternoon the currency and interest rates had given up most of their gains.

While the Reserve Bank's message remained largely the same as the one communicated in its August monetary policy statement, there were elements in the release that left the market in no doubt that it was taking a tougher, more hawkish, stance on inflation, which ran at 7.3 per cent in the June year.

The Reserve Bank of Australia (RBA) this week hiked its rate by just 25 basis points against market expectations of a 50 bp hike, to 2.60 per cent.

The fact that the local central bank had not followed the RBA's more cautious lead was counted as another hawkish factor.

Market strategists said minutes showing the monetary policy committee bank had entertained the idea of going by 75 basis points instead of 50 had added to the hawkish tone.

Westpac senior markets strategist Imre Speizer said the central bank's messaging, at the margin, had a harder more hawkish edge to it.

The Reserve bank's closely-followed forecast OCR track, last published in August, has the rate peaking at 4.1 per cent by June next year.

Private sector banks see it going higher than that - ANZ has forecast a peak of 4.75 per cent.

The New Zealand dollar, along with most currencies around the world, has been sharply weaker in recent weeks due to the aggressive stance on inflation taken by the US Federal Reserve - a point noted in the Reserve Bank's committee minutes.

"Higher global interest rates and increased risk aversion in global markets have placed downward pressure on the New Zealand dollar," the minutes say.

"Members believed that this would contribute toward a rebalancing of New Zealand's current account over the long-term.

"However, a lower New Zealand dollar, if sustained, poses further upside risk to inflation over the forecast horizon."

The minutes go on to say: "The committee considered whether to increase the OCR by 50 or 75 basis points at this meeting.

"Some members highlighted that a larger increase in the OCR now would reduce the likelihood of a higher peak in the OCR being required."

Westpac's Speizer said the 75 versus 50 argument was a clue that the committee sees the OCR track lifting come the release of its November 23 monetary policy statement.

Similarly, the committee's comments on the weak New Zealand dollar was a sign, Speizer said.

"It's saying that that is another source of upside risk to tradeable inflation, which again is a clue that the OCR track will be higher."