‘Booming’ economy increases pressure on RBNZ to advance further
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New Zealand’s economy grew faster than investors expected in the second quarter of the year, raising bets that the Reserve Bank of New Zealand (RBNZ) has room to raise interest rates further.
New Zealand’s GDP grew 1.7% quarter-on-quarter in the second quarter of 2022, Stats NZ said, which was well above the 1.0% expected by markets.
It is also a solid rebound from the 0.2% decline recorded in the first quarter.
The figures took the year-on-year GDP increase to 0.4%, double the figure the market expected.
“Economy soars in second quarter,” said a note from local bank ASB in response to the data.
“The recent GDP results have turned out to be mostly noise rather than an economic signal, but it looks like the second quarter numbers have more substance, with the openness of the New Zealand economy clearly positive,” says Mark Smith, chief economist at ASB.
Above: New Zealand’s average annual GDP growth.
The sharp 2.7% quarter-on-quarter increase in service sector output highlighted the impact of the reopening.
By contrast, the goods value added component contracted 3.8% quarter on quarter, largely due to the closure of the Marsden Point oil refinery, which weighed on manufacturing value added. (-5.9% in the second quarter).
ASB raised its forecast for the number of bulls it now expects to come out of the RBNZ over the rest of the year by 25 basis points to 125 basis points.
Such a rise in rate hike expectations could provide the Kiwi Dollar with some support via the yield channel.
The exchange rate between the British pound and the New Zealand dollar (GBP/NZD) was quoted at 1.9182 after the data was released, ensuring the pair remains near the middle of an unbroken range since March.
Those using their bank to transfer money in Kiwi dollars will see rates around 1.8639 while those using payment providers will see rates closer to 1.9120.
The exchange rate between New Zealand and the US dollar (NZD/USD) was however at 0.6004, ensuring that it remained close to its 2022 lows and confirming that the US dollar remains the supreme driver of this pair. .
Nonetheless, strong GDP data and any rise in rate hike expectations could limit the extent of any further USD advance.
“GDP data is still noisy, and continued wage and CPI inflation pressures, combined with fiscal expansion, mean the RBNZ has its back to the wall. They will raise the OCR to at least 4 % by the end of the year, regardless of where the activity lands,” says Sharon Zollner, chief economist at ANZ Bank.