New Zealand central bank holds rate at 2.75% but signals possible hikes

what happened

According to Reuters, the Reserve Bank of New Zealand held its official cash rate at 2.75%, even though 22 of 27 economists polled had expected a 25 basis point increase. The vote was split: four committee members, including Governor Anna Breman, backed a hold, while three wanted a hike. In its minutes, the bank said tighter policy is likely to be needed depending on the economic outlook.

The New Zealand dollar fell to $0.5590 from $0.5676 after the decision, and two-year swap yields dropped from 4.1109% to 3.9497%. The central bank expects annual inflation to rise to 4.4% in the December quarter as fuel prices climbed during the US-Israeli war with Iran. A general election takes place 10 days later.

why it matters

For markets, the decision signals that the tightening cycle may take longer to resume. A pause reduces bets on further hikes, which pressures short-dated yields and the local currency. However, the central bank's language about possible increases still leaves risk for bonds if inflation keeps accelerating.

market impact

NZ dollar and swaps: the surprise pause cuts hike expectations, pressuring the currency and yields

• ▼New Zealand dollar pressure down — the surprise pause reduced expectations of a rate hike
• ▼NZ 2-year swaps pressure down — expectations for a higher rate faded, pushing yields lower

tags

instruments