The New Zealand Dollar rose against most global currencies as investors bet on a rate hike by the central bank in the near future.

The Reserve Bank of New Zealand (RBNZ) announced it is contemplating tighter mortgage lending standards, lowering banks’ low-deposit lending from 1 October, as well as implementing debt-to-income limits and/or interest-rate floors later in 2021. 

According to Adam Cole, Senior Currency Strategist at RBC Capital Markets, the New Zealand Dollar has risen in response to the proposed measures.

"The probability of an August 18 RBNZ hike rose from 60% to 80% and we note that markets now see macro-prudential measures of this kind as compliments rather than substitutes for conventional policy," he said.

The Pound-to-New Zealand Dollar exchange rate declined following the central bank’s statement, standing at 1.9813.

Meanwhile, the New Zealand Dollar-U.S. Dollar exchange rate rose by a third of a percent to 0.7011. "This is also leading to market participants pricing in an early hike from the RBNZ and as a result the NZ dollar is up," stated Deutsche Bank strategist Jim Reid.

The RBNZ is seeking to make sure borrowers can withstand the potential economic and financial conditions in the future, says RBNZ Deputy Governor and General Manager for Financial Stability Geoff Bascand.

"We are particularly concerned about those who have borrowed in the past 12 months at high LVRs and high DTIs," said Bascand.

“If house prices were to fall, some buyers could face the possibility of negative equity – which means the value of their property is below the outstanding balance on their mortgage," he added.

The Deputy Governor said the central bank will also be looking to reduce further the amount of high loan to value ratio lending to owner-occupiers, reports Pound Sterling Live, restricting banks’ lending above an LVR of 80% to 10% on new loans.