NZ dollar rallies, interest rates gain after Reserve Bank survey

The Kiwi jumped by about a quarter of a US cent to US70.23c following a Reserve Bank survey on inflation expectations. Photo / Getty Images

The New Zealand dollar firmed and wholesale interest rates gained after the Reserve Bank's latest survey of inflation expectations came in higher than expectations.

The Kiwi jumped by about a quarter of a US cent to US70.23c and two-year swap rates - a key influence on mortgage rates - surged to 2.42 per cent from 2.37 per cent before the survey's release.

The Reserve Bank's release showed two-year-out inflation expectations ran at 2.97 per cent - a 13-year high for the survey.

Market expectations are for the Reserve Bank to lift its official cash rate (OCR) by 25 basis points to 0.75 per cent next week but wholesale markets are pricing in an outside chance of a 50-basis-point hike. Today's data backs the latter.

Westpac senior market strategist Imre Speizer said it was surprising the currency did not rally further on the news.

"I think it will be a 25-basis-point move next week but I would not be surprised at all to see it go by 50," he said.

ASB Bank said the survey's inflation outcome was larger than it had expected but that it was consistent with third quarter CPI data, which showed year-on-year inflation running at 4.9 per cent.

The low number of survey responses - just 35 for the survey - typically suggests some caution in interpreting the results, ASB said.

"Nevertheless, the shift in short-term inflation expectations further above the inflation target midpoint, with the 2-year ahead CPI measure close to outside the 1-3 per cent inflation target zone, suggests the Reserve Bank has considerably more work to do on official cash rate settings.

"We expect a 25bp OCR hike next week but acknowledge the decision will be a very close call," ASB said.

The Reserve Bank is due to release its monetary policy statement on Wednesday.

The central bank started its tightening cycle with a 25 basis point hike to 0.50 per cent on October 6.