Reserve Bank of New Zealand Surprises Markets With Rate Hold at 2.75%

what happened

The Reserve Bank of New Zealand left its official cash rate at 2.75%, although money markets had priced in a near-certain increase, with the probability put at 95%. The decision came from a split 4-3 vote by the monetary policy committee.

The central bank still said further increases are likely. Governor Breman told reporters that inflation trends mean more hikes are expected, and that the next move could be considered in December, when fresh forecasts are published. The economy shows signs of recovery, but unemployment remains near an 11-year high.

The New Zealand dollar fell by close to one U.S. cent after the decision and then steadied just above 56.00 cents. Sharon Zollner, chief economist at ANZ Bank, said some members preferred to watch developments over the next six weeks, given downside risks to global growth. ANZ still forecasts three more hikes, taking the rate to 3.5%.

why it matters

The pause matters for currency and bond traders, since the New Zealand dollar and local yields are sensitive to rate expectations. It also signals a cautious central bank amid the Middle East war and elevated fuel prices.

market impact

NZD and NZ bonds: pause cuts rate-hike expectations, pressuring the currency and yields

• ▼NZD/USD pressure down — the surprise pause reduced expectations of further rate increases
• ▼New Zealand government bonds pressure down — weaker hike expectations lower yields

tags

instruments