Before the end of the week, the exchange rate between the pound and New Zealand dollar increased to its peak level since October. The Kiwi weakened after the release of inflation data by Statistics New Zealand, which indicated a drop in New Zealand’s inflation to its lowest point in over a year. Despite this positive development, some analysts are expressing caution about the future prospects of the pound.
New Zealand’s inflation data
The most recent quarter saw a decrease in New Zealand’s inflation rate which was lower than both economists’ consensus and the Reserve Bank of New Zealand’s latest forecasts.
The CPI data for the first quarter of CY2023 was lower than expected, with inflationary pressures increasing by only 1.2%, compared to the consensus forecast of 1.7% and the previous release of 1.4%. The annual inflation rate has also dropped to 6.7%, while analysts were anticipating a smaller decline to 7.1% from 7.2% previously.
This significant drop in inflation in New Zealand suggests that the Reserve Bank of New Zealand (RBNZ) is taking the right steps to combat inflationary pressures. It is important for investors to note that RBNZ Governor Adrian Orr unexpectedly raised interest rates by 50 basis points (bps) to 5.25% during the last monetary policy meeting held on the 5th of April. The Reserve Bank of New Zealand will likely make its final interest rate increase in May.
Reserve Bank of New Zealand interest rate hike
Economists have suggested that the Reserve Bank of New Zealand (RBNZ) is likely to implement a cash rate increase from 5.25% to 5.5% in the coming month, before proceeding to lower the benchmark rate in November. This timing may have been a factor in the financial markets’ decision to sell off the New Zealand Dollar on Thursday.
Following the release of the New Zealand CPI data, the NZD/USD and New Zealand swap rates decreased across the yield curve. GBP/NZD reached some of its highest levels since the UK government budget in September of last year. This increase was supported by Sterling’s rally, which followed the release of March inflation figures in the UK on Wednesday.
Joseph Capurso, who serves as the head of international economics at Commonwealth Bank of Australia, predicts that the NZD may experience a further modest decline during the London and potentially New York trading sessions.
UK inflation and the pound
UK inflation failed to drop to single digits last month, as the rate only fell from 10.4% to 10.1%. Core inflation remained unchanged at 6.2% for the second consecutive month. With markets having already priced in a 25 basis point hike by the Bank of England (BoE) in May, the bank may potentially increase the rate further over the summer.
While the bank expected price growth to decelerate, the inflation data could cause some concern. Interest rate derivative markets indicate a chance of the BoE raising the Bank Rate to 5% in the upcoming months.
The BoE is anticipated to implement one or two more rate hikes, which could potentially result in a decline in GBP value.
With the current volatility, contacting a currency specialist will allow you to safeguard your business and finances by planning ahead. If you are a business transferring funds overseas, get in touch with Universal Partners FX and their dedicated team to discuss the latest market movements ahead of your currency exchange. Universal Partners FX can provide invaluable help on efficient risk management and tailored solutions to your business’ transfer needs.