NZD rally may end due to doubts about RBNZ's aggressive policy

The New Zealand dollar is up 18% from its October low. New Zealand's currency was boosted by the easing of COVID curbs in China and optimism about the fact that rates are nearing their peak. The Reserve Bank (RBNZ) said that the key rate should be raised from 4.25% to 5.5% next year. However, some analysts argued that these measures are too aggressive, since the labor force growth caused by migration will reduce inflation.

 Kiwibank Ltd. Senior Economist Jeremy Couchman said the arrival of migrants will help alleviate the labor shortage and the pressure placed on the labor market. He also added that rising net migration could increase the risk of the RBNZ excessive tightening.

According to Bloomberg Economics, the RBNZ is unlikely to deliver on the 125 basis points of rate hikes planned for 2023. This could be caused by the rapid replenishment of labor shortages. Instead, the RBNZ will raise rates by 50 basis-point for the last time in February before taking a pause. Such a move should put pressure on the kiwi dollar as investors unwind their hawkish expectations.