If, as expected, the Reserve Bank today keeps its official cash rate at 5.5 per cent it will be high by world standards, but other central banks are catching up.
And an already-weakened New Zealand dollar - which usually enjoys a favourable interest rate differential over its peers - may lose more ground as that advantage evaporates.
As it stands, the Kiwi is already on the back foot, trading yesterday at US62.14 cents from US65.10c in February.
Kiwibank chief economist Jarrod Kerr says the Kiwi – long favoured by foreign investors because it’s a high yielder - could fall as low as US55c by the end of the year as other central banks play catch-up.
Taking centre stage in the worldwide campaign against inflation is the US Federal Reserve, whose Fed Funds rate sits at 5.25 per cent.
Current market wisdom is that the Fed will hike again - twice - before the year is out.
“They do look like they are going to deliver another two rate rises later this year, which would take them to the same level as us,” Kerr says.
“We got there a bit earlier.”
The Reserve Bank (RBNZ) kicked off its tightening cycle in October 2021 - a good seven months ahead of the Fed - and it looks like it is heading to the same end point.
“The RBNZ is pausing at 5.5 per cent, and it looks like the rest are catching up.”
The Reserve Bank of Australia may have paused but there is a risk it may have to do more from its current setting of 4.1 per cent.
There is also talk of more rate rises around the world, particularly from the European Central Bank (3.5 per cent) and the Bank of England (5.0 per cent).
For most central banks - with the notable exceptions of the Bank of China and the Bank of Japan - the direction of travel looks to be higher.
“One of the key differences for us is that our rates have got there harder and faster, while the others are catching up, so those interest rate differentials have narrowed, and that’s putting pressure on the currency,” Kerr says.
A weak currency is seen as positive for the inbound tourism sector as it makes the country a cheaper destination, and improves returns for exporters as they convert foreign earnings back into New Zealand dollars.
However, it generally adds to inflationary pressure as it makes imports more expensive.
Kerr said just as New Zealand was quick out of the blocks to tighten, it could be ahead of the game when it comes to cutting as well.
“A lot is going to happen in the next six months when people will feel the full impact of rate rises in New Zealand,” he said.
Economists say the frustrating thing about monetary policy in New Zealand is the fact that most Kiwis are on fixed home mortgage rates, and it takes time for those fixed rates to roll off.
“Half of our mortgage book has re-priced. The other have is about to re-price in the next six months,” Kerr says.
“There are a lot of people coming off fixed fates over spring and summer and they are really off record low mortgage rates on to much higher rates.”
For some, that could mean going off 2.5 or 3 per cent and on to something closer to 7.
Interest rate markets have broadly been onside with the Reserve Bank in predicting that 5.5 per cent will be the peak for the OCR.
However, wholesale interest rates have steadily risen, and the perception is that the official rate may stay higher for longer.
RBNZ rate cuts - previously priced in for February next year - have instead been pushed out to August-October next year.
While there is widespread expectation of an unchanged OCR for this week’s rate call, some analysts are still of the view the Reserve Bank has more work to do.
Jamie Gray is an Auckland-based journalist, covering the financial markets and the primary sector. He joined the Herald in 2011.