RBNZ holds rate at 2.75%, wrong-foots markets expecting a hike
The Reserve Bank of New Zealand kept its Official Cash Rate at 2.75% on Wednesday, defying market pricing for a 25-basis-point increase. The New Zealand Dollar fell sharply on the decision.
Money markets had fully priced a move to 3%, with New Zealand’s Q3 inflation still running at 3.7% year-on-year and Q2 GDP growth beating forecasts at 2.6% year-on-year. The RBNZ chose to stand pat instead.
The vote was split. Four committee members — Anna Breman, Carl Hansen, Prasanna Gal and Rebecca Williams — backed holding the OCR, while three others, Paul Conway, Hayley Gourley and Karen Silk, wanted a hike.
In its Monetary Policy Review, the committee said members broadly agreed that tighter policy is probably still needed, though they differed on how much weight to give various risks and on the timing of further moves. The RBNZ flagged that higher refined fuel prices and currency depreciation could add indirect inflation pressure, and warned of a risk that inflation becomes entrenched even after two prior OCR increases. It said New Zealand’s recovery could prove stronger than expected but might lose momentum if global conditions deteriorate, and reiterated its focus on returning inflation to the 2% midpoint over the medium term.
The New Zealand Dollar dropped immediately after the announcement, with NZD/USD trading at 0.5600, down 1.46% on the day, making the currency the weakest among major peers this week.
Why it matters: A surprise hold instead of the widely expected hike removes anticipated rate support for the New Zealand Dollar, pressuring NZD/USD lower. The split vote and cautious guidance on further tightening also leave traders watching upcoming New Zealand inflation and growth data for clues on the RBNZ’s next move.
Source: FXStreet