New Zealand’s central bank likely to lift rate to 3% this week
Economists broadly expect New Zealand's central bank to push its benchmark rate up by a quarter point to 3% on Wednesday, a third consecutive increase that should drive moves in NZD/USD and short-term yields.
Only a short time ago, policymakers appeared set to hold steady. Having pushed the benchmark rate up to 2.75% in early September, Governor Anna Breman had suggested the bank could pause in October. That expectation has largely evaporated as crude prices rose and the kiwi dollar softened, amplifying concerns about an inflation outlook already sensitive to fuel costs.
Analysts polled by interest.co.nz now view another increase as nearly certain, pointing to the combined effect of pricier oil, a weaker currency and inflation that refuses to ease. A separate Bloomberg survey similarly found most forecasters anticipating the cash rate will climb to 3% this week.
Yearly consumer price growth cooled to 3.7% in the September quarter, down from 4.1% in June and under the Reserve Bank’s own forecast of 3.9%. Despite this, a number of economists anticipate a pickup in the final quarter of the year, with some projecting figures approaching 4.7% — which would mean inflation stays outside the bank’s 1%-3% target range longer than previously expected.
Market pricing reflects this outlook. ASB puts the probability of a quarter-point move at around 90%, forecasting the rate will top out near 3.5% by February. Westpac takes a more hawkish view, suggesting the benchmark could climb as high as 4% by September 2027. ASB has also cautioned that choosing to hold rather than hike would probably put downward pressure on the New Zealand dollar.
The decision comes just ten days ahead of New Zealand’s general election scheduled for November 7, although economists largely agree the committee’s choice will be driven by economic conditions rather than politics. Views differ on whether officials will also hint at additional tightening ahead or keep their language non-committal.
The result will be announced at 01:00 GMT Wednesday, equivalent to 21:00 ET Tuesday.
Since a rate increase is already largely reflected in pricing, the wording of the accompanying statement regarding future policy will likely be the main driver of movement in NZD/USD and New Zealand’s short-dated bond yields. Any indication that oil-fuelled inflation could prompt further tightening may also keep traders focused on AUD/NZD, particularly with the Reserve Bank of Australia expected to raise rates on November 3.
Source: investingLive