The interest rate increase by the Reserve Bank of New Zealand has propelled the New Zealand dollar upwards. The uptrend is likely to continue, experts say.

On Wednesday, February 23, NZD jumped to its 5-week high after the regulator hiked the interest rates. The Reserve Bank of New Zealand increased the rate by 25 basis points to 1% and intends to continue monetary tightening in the future. Investors did not expect the central bank to take such a hawkish stance. The RBNZ could discuss more rate hikes at its future meetings.

The board of the RBNZ has decided to continue winding down monetary stimulus to tackle high inflation, which is far above the target level of 2%. The central bank strives to keep price growth within the range of 2-3%. However, it would require ending monetary stimulus and reverting to pre-pandemic policy.

The current situation favors the New Zealand dollar. According to MUFG Bank, NZD was the best-performing G10 currency. Growing inflationary risks have been the main driving force behind the regulator's hawkish policy. In late 2021, consumer prices in New Zealand jumped by 5.9%, reaching a 30-year high.

Continuing demand for NZD has also propelled the currency upwards. The New Zealand dollar has been steadily rising, extending its bullish momentum and outrunning its American counterpart. Thanks to support from fundamental factors, NZD has managed to ignore tensions in Eastern Europe. NZD/USD hovered near 0.6797 on Wednesday. In this situation, traders should keep long positions targeting 0.7000 open.

The New Zealand economy is outperforming its current potential due to the hawkish policy shift of the RBNZ. According to an adjusted outlook by Goldman Sachs, the regulator is expected to increase the interest rate by 25 basis points at every policy meeting in 2022 up to 2.5%. The forecast is in line with the Reserve Bank's plans to hike the rate to 2.5% in 2022 and 3.3% in late 2023.

This week, New Zealand's central bank signaled its resolve to bring inflation under control with its hawkish policy shift. In the medium term, inflationary pressure is expected to go down. The RBNZ is likely to continue tightening its monetary policy throughout the year.