New Zealand financial markets took news of a 5.9 per cent increase in inflation in 2021 largely in their stride, with most of the reaction taking place in the bond markets in response to the US Federal Reserve's latest monetary policy update.
The Fed signalled its intention to raise interest rates in March, which would be the first increase since 2018.
"With inflation well above 2 per cent and a strong labour market, the committee expects it will soon be appropriate to raise the target range for the Federal funds rate," the Fed policymakers said in a statement at the end of a two-day meeting.
New Zealand 10-year bonds took their lead from US Treasuries and traded up at 2.7 per cent - their highest point since November 2018 - before retreating a little after the CPI.
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The post-Fed retreat in New Zealand swap and bond yields suggested the market had put the risks towards a higher number than economists' forecasts.
Westpac senior market strategist Imre Speizer said the US market reaction to the Fed's statement was muted, until Fed chairman Jerome Powell's comments at a news conference suggested the central bank was taking on a more hawkish than expected stance.
"The NZ CPI was within expectations, so the market put that aside," Speizer said.
"It was all about the Fed, which delivered a hawkish surprise to the markets by intimating that it might tighten faster than previously thought, which has pushed rates up everywhere," he said.
The New Zealand two-year swap rate jumped to 2.5 per cent on the Fed news from 2.44 per cent earlier, then backed off by 2 basis points after the CPI.
The New Zealand dollar was static, post CPI, at around US66.50c and the New Zealand share market was a touch softer.
By midday, the S&P/NZX/50 index was at 12,178, down 0.6 per cent from Wednesday's close.