Band Wayne Cole

SYDNEY, May 25 (Reuters) – The New Zealand dollar surged on Wednesday after the country’s central bank hiked interest rates by half a point and sharply raised its forecast for future hikes, pushing bond yields higher as the market struggled follow.

In a hyper-hawkish statement, the Reserve Bank of New Zealand (RBNZ) raised its official exchange rate (OCR) by 50 basis points (basis points) at 2.0% and is expected to reach 3.4% by the end of the year, a seismic change from the previous call of 2.2%.

There are only four policy meetings left this year to hit 3.4%, implying at least two more 50 basis point moves.

The swaps now imply a cash rate around 2.44% for July and 3.53% by the end of the year, up from 3.23% before the statement. RBNZWATCH

The bank also expected rates to peak at 3.95% by September next year, whereas it previously forecast a peak of 3.4% that would not be reached until September 2024.

“The Committee has agreed to continue raising the OCR at a pace that will confidently bring consumer price inflation back into the target range,” RBNZ Governor Adrian Orr said.

“Once aggregate supply and demand are more balanced, then the OCR can return to a lower, more neutral level,” he added, forecasting rates to fall to 3.5% d by mid-2025.

Surprised investors lifted the Kiwi Dollar 0.7% to a two-week high of $0.6510 USD=D3, breaking the resistance at $0.6500. The next bullish target is $0.6568.

The Australian dollar edged up 0.2% to $0.7115 AUD=D3 as the market debated whether the Reserve Bank of Australia (RBA) might also choose to move faster, although futures 0#YIB: still imply a quarter point move to 0.6% in June.

The Aussie found itself selling against the Kiwi, bringing it down to NZ$1.0933 AUDNZD=Rfrom a start of NZ$1.1031.

A reeling debt market drove up two-year swap rates NZDSM3NB2Y= to 3.71%, from 3.45% at the start, the largest daily increase since last October.

10-year bond yields NZ10YT=RR rose 12 basis points to 3.55% as the yield curve flattened as the market weighed more on the risk of an upcoming recession.

“The Bank’s hawkish tone and more aggressive rate hike forecast suggest that our own aggressive forecast is now too dovish,” said Ben Udy, an economist at Capital Economics.

“We are raising our forecast for the next two Bank meetings to rate hikes of 50 basis points.”

However, he thinks such a drastic tightening will tip the housing market into a slowdown and force the RBNZ to start relaxation from the second half of 2023.

(Reporting by Wayne Cole, editing by Richard Pullin and Kim Coghill)

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