UPDATE 1-New Zealand dlr jumps as RBNZ hikes, warns much more to come

Updates prices, adds futures for RBA

By Wayne Cole

SYDNEY, May 25 (Reuters) – The New Zealand dollar jumped on Wednesday after the country’s central bank raised interest rates by half a point and sharply lifted its projection for future hikes, sending bond yields surging as the market scrambled to keep up.

In a hyper-hawkish statement, the Reserve Bank of New Zealand (RBNZ) raised its official cash rate (OCR) by 50 basis points (bps) to 2.0% and projected it would reach 3.4% by the end of the year, a seismic shift from the previous call of 2.2%.

There are only four policy meetings left this year to reach 3.4%, implying at least two more moves of 50 bps.

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

The bank also projected a peak for rates at 3.95% by September next year, when previously it had forecast a top of 3.4% that would not be reached until September 2024.

“The Committee agreed to continue to lift the OCR at pace to a level that will confidently bring consumer price inflation to within the target range,” declared RBNZ Governor Adrian Orr.

“Once aggregate supply and demand are more in balance, the OCR can then return to a lower, more neutral, level,” he added, projecting rates will ease to 3.5% by mid-2025.

Startled, investors lifted the kiwi dollar 0.7% to a two-week top of $0.6510 NZD=D3, breaking resistance at $0.6500. The next bull target is $0.6568.

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

The Aussie ran into selling against the kiwi which pulled it down to NZ$1.0933 AUDNZD=R, from an early NZ$1.1031.

A shocked debt market lifted two-year swap rates NZDSM3NB2Y= to 3.71%, from an early 3.45%, the largest daily rise since last October.

Yields on 10-year bonds NZ10YT=RR rose 12 basis points to 3.55%, while the yield curve flattened as the market priced in more risk of recession ahead.

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

“We’re lifting our forecasts for the Bank’s next two meetings to 50 bp rate hikes.”

However, he thinks such a drastic tightening will tip the housing market into a downturn and force the RBNZ to start easing as early as the second half of 2023.

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

((Wayne.Cole@thomsonreuters.com; 612 9171 7144; Reuters Messaging: wayne.cole.thomsonreuters.com@reuters.net))