14 Mar 2014
Flash: What does the RBNZ hike mean for GBP? - HSBC
FXStreet (Bali) - The hike in rates by the RBNZ is likely to have acted as the catalyst for normalisation elsewhere, in particular the UK, with the market still comfortable with a UK rate rise by early 2015, although how the New Zealand economy performs after the RBNZ decision will be an important lesson for the BoE, notes David Bloom, Global Head of FX Research at HSBC Bank.
Key Quotes
"If the tightening cycle by the RBNZ now underway can be delivered without derailing the economy or destabilising financial markets, then the market’s expectation for UK rates rises in early 2015 is likely to be unaffected."
"However, should the tightening in New Zealand have unexpected and swift adverse effects, the market would reduce its expectations for the future pace of RBNZ tightening. But the impact would not be confined to New Zealand. The RBNZ’s experience would be a potential prototype for others and in particular the BoE. It would show that economic recoveries should be allowed to progress further before the normalisation of interest rates. Given the close association between UK rate expectations and the performance of GBP, a New Zealand induced retreat in the market’s forecast of the BoE’s interest rate path would see GBP sharply lower."
"In addition, the markets will also look at how the RBNZ balances the economic case for monetary tightening with the likely boost it would provide to the NZD. Excessive currency strength would temper the pace of tightening. In the UK, comments from BoE members reflect concerns that GBP strength is undermining the rebalancing of the UK economy away from consumption. If New Zealand grapples with the currency effects of a tightening which is “priced in” by the interest rates market, then prospective GBP strength might also temper the appetite for the pace of future BoE tightening."
"If monetary policy were a golf course, the RBNZ has just taken on a putt that other central banks will also face. If the ball drops into the hole, then expectations for the pace of tightening by other central banks will be unaffected. But if the ball takes a wayward turn, other central banks will have learned an important lesson and will recalibrate accordingly. The markets and GBP would have to recalibrate too. It is therefore worth following the financial and economic impact of this tightening because it will travel far beyond the Tasmanian sea."
Key Quotes
"If the tightening cycle by the RBNZ now underway can be delivered without derailing the economy or destabilising financial markets, then the market’s expectation for UK rates rises in early 2015 is likely to be unaffected."
"However, should the tightening in New Zealand have unexpected and swift adverse effects, the market would reduce its expectations for the future pace of RBNZ tightening. But the impact would not be confined to New Zealand. The RBNZ’s experience would be a potential prototype for others and in particular the BoE. It would show that economic recoveries should be allowed to progress further before the normalisation of interest rates. Given the close association between UK rate expectations and the performance of GBP, a New Zealand induced retreat in the market’s forecast of the BoE’s interest rate path would see GBP sharply lower."
"In addition, the markets will also look at how the RBNZ balances the economic case for monetary tightening with the likely boost it would provide to the NZD. Excessive currency strength would temper the pace of tightening. In the UK, comments from BoE members reflect concerns that GBP strength is undermining the rebalancing of the UK economy away from consumption. If New Zealand grapples with the currency effects of a tightening which is “priced in” by the interest rates market, then prospective GBP strength might also temper the appetite for the pace of future BoE tightening."
"If monetary policy were a golf course, the RBNZ has just taken on a putt that other central banks will also face. If the ball drops into the hole, then expectations for the pace of tightening by other central banks will be unaffected. But if the ball takes a wayward turn, other central banks will have learned an important lesson and will recalibrate accordingly. The markets and GBP would have to recalibrate too. It is therefore worth following the financial and economic impact of this tightening because it will travel far beyond the Tasmanian sea."