On May 23, the market generally expected the New Zealand Federal Reserve to raise interest rates by 25 basis points to 5.50% on Wednesday, but recent developments have increased the risk of an unexpected rate hike by the central bank.
Most analysts expect the RBNZ to raise interest rates by 25 basis points, signaling an end to the tightening cycle, according to the latest Reuters poll.
But the survey was conducted ahead of the release of New Zealand’s budget, which is expected to be a driver of inflation.
Analysts at Westpac Bank pointed out that the Budget, combined with a large increase in immigration, may persuade the RBNZ to change its terminal interest rate forecast of 5.50%.
If the RBNZ decides to revise that forecast up to 6.0%, they see a strong chance of a surprise 50 basis point hike on Wednesday. Markets began to price in expectations for a hawkish rate hike from the bank after the budget was announced.
There is a 42 percent chance the RBNZ will raise interest rates by 50 basis points to 5.75 percent on Wednesday, according to Refinitiv data, and could reach a terminal rate of around 5.86 percent at its August meeting.
If the bank unexpectedly raises interest rates by 50 basis points, the New Zealand dollar is expected to rise by then.