Summary
- The RBNZ unexpectedly held the OCR at 2.75% in a 4-3 vote, defying forecasts for a hike to 3%. It said tighter policy is likely but conditional, citing lower-than-expected inflation, subdued wages and fragile growth, and sees CPI at 4.4% in Q4.
Oil sits at the centre of the call: the RBNZ expects fuel to lift inflation to 4.4% in the December quarter, but the majority chose to look through the direct effects for now, betting that weak demand will limit pass-through. With a hike close to fully priced, the hold is likely to hit the New Zealand dollar and pull front-end yields lower. The 4-3 split and the guidance that tighter policy is still likely should limit how far December pricing unwinds. Policy divergence is now sharp. Hotter Australian core inflation this morning and a hawkish Bullock contrast with a cautious RBNZ, which points to upside for AUD/NZD into the RBA meeting on November 2 and 3. The RBNZ’s warning about opaque AI financing and an abrupt global downturn adds a dovish tail risk that markets had largely ignored.
- Preview: RBNZ set to lift OCR to 3% ahead of election as oil and weak kiwi fuel inflation
- NZIER Shadow Board majority backs 25bp RBNZ hike to 3% as oil and weaker kiwi bite
The RBNZ blinked: with a hike almost fully priced, four of seven members chose to wait, betting that weak demand will contain the fuel shock, while keeping December firmly in play.
- The RBNZ held the OCR at 2.75% in a 4-3 vote. Breman, Hansen, Williams and Gai voted to hold, while Gourley, Conway and Silk voted for a hike to 3%.
- The decision surprised markets, which had priced about 90% odds of a hike, and all five major NZ banks.
- The majority cited Q3 inflation of 3.7%, below expectations, smaller fuel pass-through, subdued wages, stable expectations and a weak domestic recovery.
- The RBNZ expects annual inflation to rise to 4.4% in the December quarter on fuel. Core inflation is around the top of the 1% to 3% band, and price rises have broadened.
- It flagged rising financial stability risks, including opaque financing for some AI investments, and warned a global downturn could come abruptly.
- All members agreed tighter policy is likely to be required but conditional. The next decision, with new forecasts, is in December.
The Reserve Bank of New Zealand unexpectedly held its official cash rate at 2.75% on Wednesday, with the Monetary Policy Committee split 4-3, wrong-footing markets and every major local bank that had forecast a third consecutive hike. The committee said tighter policy is still likely to be needed, but that the timing remains conditional on the economic outlook.
Governor Anna Breman, Carl Hansen, Rebecca Williams and Prasanna Gai voted to hold, while Hayley Gourley, Paul Conway and Karen Silk voted for a 25 basis point increase to 3%. Markets had priced roughly a 90% chance of a hike ahead of the decision, and ANZ, ASB, BNZ, Westpac and Kiwibank had all expected a move.
The majority argued that the two hikes delivered in July and September give the committee time to assess their effects. Annual CPI inflation eased to 3.7% in the September quarter from 4.1% in June, lower than the RBNZ had expected, as the indirect effects of higher fuel prices proved smaller than assumed. These members noted that wage growth remains subdued, medium-term inflation expectations are stable and there is little evidence so far that businesses are using higher costs to widen their margins. They also stressed the risk of a weak recovery in household spending and investment.
The minority took a more hawkish view. They argued that core inflation has been above levels consistent with the target midpoint for some time, raising the risk that inflation becomes entrenched in price setting as the Middle East conflict and higher freight and shipping costs persist. With aggregate growth proving resilient, they said acting now would guard against sustained price pressure and could reduce the need for larger rate increases later, favouring a move to around the midpoint of the neutral range.
Fuel remains central to the outlook. The RBNZ said fuel prices have risen further because of ongoing disruption in global energy markets, including lost refining capacity and shipping problems, while the New Zealand dollar’s trade-weighted index has fallen around 3% since early September. It expects annual inflation to rise to 4.4% in the December quarter, largely on the basis of current oil futures prices, but cautioned that near-term forecasts are highly uncertain given volatility in oil and refined fuel prices. Excluding vehicle fuels, annual inflation rose to 3.0%, and core measures have climbed to around the top of the 1% to 3% target band. Price increases have also broadened, with 56% of the CPI basket, by weight, rising by more than 3% over the year.
The domestic economy is recovering unevenly. Export-exposed regions are benefiting from high commodity prices, strong goods demand and rising tourist numbers, while household consumption remains weak, employment growth is subdued and house prices continue to fall. The household saving rate is estimated at 3.7%, well above its 10-year average of 1%, suggesting consumers remain cautious.
The committee also flagged growing global risks. It said financial stability risks have increased since September, citing high debt levels and opaque, complex financing arrangements for some AI investments, and warned that rising long-term interest rates could expose vulnerabilities and that a global downturn could occur abruptly. Two members, Gai and Breman, said that risk should be factored into judgements about the neutral rate, the level at which policy neither stimulates nor restrains the economy, rather than relying on midpoint estimates.
The RBNZ made clear its next move could go either way. Members said information over the next six weeks could change the appropriate stance in either direction. Further tightening could be warranted if domestic price pressures fail to ease or broaden beyond what costs and normal pass-through can explain, while subdued pressures could justify holding. A sharp global downturn could even lead to easing.
The next decision comes with the December Monetary Policy Statement, which will include updated forecasts. Breman holds a media conference at 3pm New Zealand time, which is 02:00 GMT.
Got a minute? Explore our collection of quick, practical lessons about trading, investing, and understanding the markets.
Must Read
- S&P 500 rebounds as US-Iran escalation fears fade, but bearish drivers remain intact. What's next?
- Flávio Bolsonaro reportedly flees Brazil for the US after election loss
- Gold tests its 100-hour moving average as buyers look for more control
- Bitcoin trades in a narrow range above and below $80,000. What would get the digital currency out of its rut?
- Trading on Margin: What It Means and How to Get Started
- Why the Federal Reserve matters more to crypto market than many investors realise
- France consumer confidence plunges to lowest since 2013 as fiscal worries deepen
- China tech stocks plunge as AI trade cracks deepen, is Wall Street next?
- ROADMAP: Morgan Stanley sees three catalysts ending the correction to ~7150, then S&P 500 to 8,000
- Macro takeaways from earnings: Travel, package delivery and home appliances in focus
