Last week saw the Pound to New Zealand Dollar exchange rate defy an increase in risk-sentiment and advance from 1.75 to 1.76.
This was largely due to the week’s unexpected Bank of England (BoE) news, which saw hawkish policymaker Kristin Forbes vote to hike UK interest rates. She was the first member of the Monetary Policy Committee (MPC) to vote for a rate hike since Ian McCafferty in January 2016.
The BoE was expected to leave UK monetary policy frozen at its loosest levels on record – and did. However, Forbes’ unexpected dissent increased speculation that the quick rise in UK inflation is beginning to pressure the bank’s officials.
Bets of a UK interest rate hike from the BoE increased. Some hawkish investors believe a rate hike could be possible within the next few months, but the market consensus points to a late-2018 tightening for UK monetary policy.
However, the market consensus used to be mid-to-late 2019 for BoE tightening, meaning the long-term Pound forecast has already shifted notably to the upside as traders hope for tighter monetary policy in Britain sooner.
The next shift in BoE bets will likely come this week, after the publication of Britain’s February Consumer Price Index (CPI).
Last month’s report saw inflation actually rise more slowly than expected in January, but if inflation accelerated in February it is likely to lead to bets that other BoE policymakers will follow Forbes and become increasingly pressured to support tighter monetary policy.
Critics have pointed out, however, that Forbes is a known hawk and that most other MPC members will not be pressured into arguing for tighter policy any time soon.
Forbes is also due to step down from her term on the MPC in June, which leaves the bank without one of its more hawkish members.
In recent months, comparatively high interest rates in New Zealand have kept the New Zealand Dollar appealing despite cautiousness from the Reserve Bank of New Zealand (RBNZ).
If New Zealand’s growth figures continue disappointing, however, this could encourage the RBNZ to cut interest rates again in the coming year.
Last week’s Q4 New Zealand Gross Domestic Product (GDP) figures came in well below expectations. The yearly figure was predicted to slip from 3.5% to 3.1%, but instead fell from a revised 3.3% to 2.7%.
The quarterly result was similarly disappointing, falling from 0.8% to 0.4% and missing the projected result of 0.7%. This was the nation’s slowest quarterly growth rate since mid-2015.
While analysts believe this is just a one-off slow quarter caused by a drop in exports and an earthquake that hit the nation in late-2016, NZD’s long-term outlook could dim if growth doesn’t rebound.
Ultimately it looks like it’s going to be a while before either central bank takes action. But if UK inflation continues rising, BoE rate hike bets will increase and the Pound has a better chance of recovering from its recent lows against the New Zealand Dollar.
At the time of writing, the Pound to New Zealand Dollar exchange rate trended in the region of 1.76. The New Zealand Dollar to Pound exchange rate traded at around 0.56.