The New Zealand dollar jumped to a five-month high after the Reserve Bank raised the benchmark interest rate as expected and signalled further hikes are on the way.
The kiwi rose as high as 85.26 US cents, from 84.73 cents immediately before the Reserve Bank's 9am statement. The local currency recently traded at 85.20 cents.
Reserve Bank governor Graeme Wheeler lifted the official cash rate a quarter-point to 2.75 percent in the first move of a tightening cycle, and signalled the potential for a steeper track of future hikes as he tries to prevent inflation accelerating. The central bank expects the official cash rate will need to rise by about 2 percentage points over the next two years.
"The RBNZ is pretty determined to begin the process of normalising rates, so there's no surprise that they've hiked the official cash rate and the outlook is more hikes over the next couple of years," said ASB economist Chris Tennent-Brown. "At this stage we're going to consider every RBNZ meeting in the future live. We'd expect them to deliver a follow up hike in April."
Governor Wheeler told a press conference following the statement that the bank's track for the 90-day bank bill rate implied 100 to 125 basis points of interest rate hikes this year.
The central bank said the New Zealand dollar will stay at an elevated level for longer than previously thought "depreciating only gradually," as the local economic story finds favour with foreign investors.
The trade-weighted index, a measure of the kiwi against a basket of five currencies, averaged 78.18 in the March quarter, ahead of the Reserve Bank's December projection of 77.4 in the period. The bank sees the TWI averaging 78.4 in the current March quarter, falling to 78 next year and 76.6 in March 2015. The TWI rose as high as 79.87, a new post-float high, and was recently at 79.76.
Governor Wheeler said today the high exchange rate is a headwind to the tradable sector and the bank doesn't "believe the current level of the exchange rate is sustainable in the long run."