Pound New Zealand Dollar (GBP/NZD) Exchange Rate Sours on Hawkish RBNZ

Pound New Zealand Dollar (GBP/NZD) Slips as Pound Loses Steam

(Updated 17:00, 5/4/23)

The Pound New Zealand Dollar (GBP/NZD) exchange rate lost its earlier gains and is now trading lower on the hawkish decision from the Reserve Bank of New Zealand (RBNZ) to raise interest rates by 50bps. Sterling could be coming under pressure as the markets reassess the Bank of England’s (BoE) monetary policy going forward.

At time of writing, the GBP/NZD exchange rate is around $1.9701, a 0.42% drop from this morning’s opening levels.

Original article continues below…

Pound New Zealand Dollar Fluctuates on Hawkish RBNZ Move

The Pound New Zealand Dollar exchange rate is trading narrowly after the Reserve Bank of New Zealand (RBNZ) unexpectedly hiked the interest rate by 50bps.

At time of writing, the GBP/NZD exchange rate is around $1.9751, relatively unchanged from this morning’s opening levels.

New Zealand Dollar (NZD) Undermined by Rate Cut Possibility

The New Zealand Dollar (NZD) initially rallied in the wake of the RBNZ surprising the markets and opting to raise the interest rate by 50bps. Taking the official cash rate (OCR) to 5.25% from 4.75%, against expectations of a 25bps increase.

In the policy statement released by the central bank, the RBNZ commented that fiscal policy risks to inflation remained on the upside, allowing them to continue tightening. They added that the New Zealand labour market remains resilient, and that they did not rule out further rate hikes.

However, capping gains, and could potentially sap demand, are concerns that rate cuts from the RBNZ could be more likely. Economists at ING are cautious over the central bank’s monetary policy going forward. Despite the markets pricing in another 25bps increase, there is a chance that the RBNZ could struggle to continue tightening if inflation slips. They added:

‘Even in the event of another hike and the 5.50% projected peak rate being reached, we think the chances of rate cuts by the end of the year have now increased materially. (Therefore), markets are likely underestimating them. This is why we would be wary about chasing NZD rallies.’

Pound (GBP) Boosted by Resilient Service Sector

Meanwhile, the Pound (GBP) held its own against a resurgent ‘Kiwi’, as the final service PMI reading points to a robust sector as it strengthens for the second consecutive month.

The service sector, despite a modest slowdown from February, stays strong and stays in expansion territory in March. Underpinning the sector’s growth was the strongest rise in new business since March 2022. Despite slowing to 52.9 from 53.5, UK service providers are enjoying a sustained expansion in business activity. Dr John Glen, Chief Economist at the Chartered Institute of Procurement and Supply (CIPS), comments on the data:

‘The biggest surge in new business for 12 months in the dominant services sector could trigger hopes that a turnaround is finally on the horizon for the UK economy.

‘Underlined by the continuing upward trend from last month’s robust levels of overall activity and March’s strong business optimism amongst respondents also had a positive effect.’

Pound New Zealand Dollar Exchange Rate Forecast: Policy Divergence to Boost the Pound?

Looking ahead, the Pound New Zealand Dollar exchange rate could be left to trade on market sentiment amid a lack of economic data. The diverging monetary policies between the Bank of England (BoE) and the RBNZ could weigh on the pairing. With the markets expecting the former to increase interest rates once again, and the RBNZ could pause, Sterling could climb.

Danny Tingle

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