New Zealand’s central bank has surprised financial markets by holding interest rates steady, despite near-certain expectations of a hike, sending the kiwi dollar plunging in its biggest daily drop in five months. The Reserve Bank of New Zealand’s monetary policy committee voted 4 to 3 on Wednesday to hold the official cash rate at 2.75 per cent, according to Dow Jones and Reuters reports. Markets had put the probability of a hike at 95 per cent, and a Reuters poll found 22 of 27 economists expected an increase. The New Zealand dollar sank as much as 1.7 per cent to an intraday low of $0.55831 before consolidating just above 56 US cents.
“Further increases are likely”
Governor Anna Breman signalled the pause was a delay, not an end to tightening. “We do think that we will see further OCR increase because of what we are seeing in inflation,” she told reporters, adding that the bank would likely consider another hike in December, when it releases fresh economic forecasts, and that rates “may even be higher than we said at the September meeting.” ANZ Bank chief economist Sharon Zollner said some committee members felt it was more prudent to watch how developments unfold over the next six weeks, with an eye on downside risks to global growth. ANZ forecasts three more hikes, in December, February and March, taking the cash rate to 3.5 per cent. Capital Economics’ Thomas Mathews said the decision looked like delayed tightening rather than a cancellation, but cautioned that market pricing had been aggressive and that more dovish surprises and kiwi weakness would not be surprising.
Election looms
The pause comes as New Zealand’s economy shows signs of recovery, though unemployment remains near an 11-year high and growth is uneven. Breman said November’s election was not a factor in the decision, though one Auckland market strategist noted the election was only 10 days away and that “it’s common courtesy not to get involved in politics.” The US dollar held onto gains elsewhere on Wednesday ahead of the Federal Reserve’s decision, with the euro flat at $1.1124 and the pound slipping 0.1 per cent to $1.32945.
