-John McDermott, RBNZ Assistant Governor
On Thursday the NZD/USD currency pair rocketed 1.61% on the back of further tightening from the RBNZ. The pair is expected to continue climbing higher, as central bank's officials claimed their readiness to make further adjustments to the OCR. Higher interest rates lead to a stronger domestic currency, and it seems that soon, we will hear something similar to the "uncomfortably high" level.
With more hikes on the horizon, the RBNZ officials are focusing on talking its currency down, citing a sharp drop in commodity prices, but not just the interest rate differential with the other major currencies. The central bank acknowledges that the hurt a falling terms of trade can become a drag on a export-exposed driven economy. One of the worrying signs is a recent drop in milk powder– one of the New Zealand core products, and which has already declined by 30% since the beginning of the year. Domestic banks have already started to increase their variable mortgage rates, as wholesale swap rates have soared up to 5% following another rate hike. Banks are expected to continue pushing their lending margins and mortgages even higher. This should cool off the housing market, however, problems like high net migration are still there and needed to be solved. The latest comments revived speculations of a July pause of the tightening process, leading to a decline in the long-term interest rates and have flatten the yield curve.
© Dukascopy Bank SA