The New Zealand Dollar (NZD) extended gains against the Aussie Dollar (AUD) on Tuesday.
The AUD/NZD pair has plunged more than 2% over the last five trading days, reaching three-and-a-half-month lows at 1.1955, weighed by the divergent monetary policy stances of the New Zealand and the Australian central banks
The Reserve Bank of New Zealand (RBNZ) hiked its Official Cash Rate (OCR) by 25 basis points to 2.50% last week and hinted at further monetary tightening in the coming months. In the press release following the decision, RBNZ Governor Anna Breman reckoned that monetary policy is still at accommodative levels, while concerns about second-round effects on inflation remain high. These views were endorsed on Monday by comments from RBNZ Chief Economist Paul Conway, who said that the bank will have to “act more firmly to re-anchor inflation expectations”, to tackle the risks of temporary shocks becoming persistent inflation.
The Reserve Bank of Australia (RBA), on the other hand, left interest rates on hold at 4.35% in June and hinted at a pause period to assess the impact of the three rate hikes delivered earlier this year. The resumption of hostilities between the US and Iran this week and the ensuing rally in Oil prices have raised speculation about a fourth rate hike by the RBA before the end of the year. The soft Australian Consumer Price Index (CPI) figures seen last week, however, cooled expectations of any immediate tightening move, and put additional pressure on the Aussie.