Wellington delivered the week's first central-bank surprise on October 28. The Reserve Bank of New Zealand kept its official cash rate at 2.75%, voting 4-3 to hold after hikes at its previous two meetings, even as 22 of 27 economists in a Reuters poll had forecast a 25-basis-point increase.
The kiwi paid for the miss at once. NZD/USD fell to $0.5590 from $0.5676, a drop of $0.0086, or 1.51%, and Reuters recorded an intraday low of $0.55831, 1.64% below the pre-decision level, after markets had priced more than a 70% chance of a hike, according to Westpac. Two-year swaps fell 16.12 basis points, from 4.1109% to 3.9497%. Governor Anna Breman voted with the four-member majority, and the bank's statement said every member agreed on the inflation outlook while differing on the weight placed on risks and the timing of a response.
That split is the story. A hold with three dissents for a hike reads as a pause in a tightening cycle, not a turn away from it.
Why it matters
Inflation explains why three members wanted to move now. Annual consumer-price inflation ran at 3.7% in the September quarter, down from 4.1% in June, yet still 0.7 percentage points above the top of the bank's 1% to 3% target band, and the bank expects it to reach 4.4% in the December quarter on higher fuel prices. Holding members wanted more time to judge the effect of the two recent increases and uneven economic conditions. Members favouring a hike argued that acting now would guard against price pressures becoming entrenched and reduce the chance of a larger move later.
Analysts at Standard Chartered read the call the same way, forecasting 25-basis-point increases in December and February that would lift the cash rate to 3.25%, with another increase in March on the table if home-grown price pressures do not fade. Moody's Analytics economist Sunny Nguyen warned that the hold raises the bar for December: if fuel prices stay high and inflation expectations drift higher, the bank may need to move then, and by more than it would have on October 28. Breman's own guidance pointed the same direction, with Reuters reporting her saying the committee expected further increases in coming meetings, and that they may run higher than the bank indicated at its September meeting.
What to watch
- December brings the next RBNZ test, with Standard Chartered forecasting a 25-basis-point increase to 3.00%.
- Wednesday brings the Federal Reserve decision, with an 89.5% hold probability priced as of October 27, leaving a 10.5% implied chance of a hike, per CME FedWatch via TalkMarkets.
- Thursday brings the European Central Bank decision, with the benchmark expected to stay at 2.50%, per Reuters reporting on October 23 in the site's standing macro file.
- A general election 10 days after the RBNZ decision keeps fiscal and mandate debate in the background for the kiwi.
- Levels to track: the 0.55831 intraday low, the 0.5590 post-decision print, and the 0.5676 pre-decision level.
Key points
- RBNZ held the official cash rate at 2.75% on October 28, in a 4-3 vote, against a 25-basis-point hike forecast by 22 of 27 economists in a Reuters poll.
- NZD/USD fell to 0.5590 from 0.5676, down 1.51%, with an intraday low of 0.55831, down 1.64% from the pre-decision level.
- Two-year swaps fell 16.12 basis points, from 4.1109% to 3.9497%, after the decision.
- September-quarter inflation ran at 3.7%, down from 4.1% in June, above the 1% to 3% target band, with 4.4% expected in the December quarter.
- Standard Chartered forecasts 25-basis-point hikes in December and February, taking the cash rate to 3.25%, with another March increase on the table if home-grown price pressures do not fade.
- The cash rate sits 2.75 percentage points below its August 2024 peak of 5.50%.
MarketRadar take
| Marker | Level | Reading |
|---|---|---|
| Pre-decision NZD/USD | 0.5676 | Level before the vote |
| Post-decision NZD/USD | 0.5590 | 1.51% below pre-decision |
| Intraday low | 0.55831 | 1.64% below pre-decision |
| Cash rate now | 2.75% | Held, 4-3 vote |
| StanChart path | 3.25% | After December and February 25bp hikes |
| August 2024 peak | 5.50% | Cash rate 2.75pp below peak |
Arithmetic frames the December meeting. A return to 0.5676 from 0.5590 needs a 1.54% rise, while a slide under 0.55831 would put the pair below every print recorded on decision day. The December inflation print and the Fed's language later on Wednesday decide whether December pricing hardens around Standard Chartered's 3.00% step.
