The New Zealand dollar took a nosedive on Wednesday after the Reserve Bank of New Zealand (RBNZ) made a surprise decision to stick with the current interest rates. By 8 a.m. ET, the Kiwi had dropped 1.3% against both the U. S. and Australian currencies, and over 1% against the British pound, Japanese yen, and euro. This latest hit compounds a nearly 5% loss against the U. S. dollar over the past half-year.
The RBNZ's Monetary Policy Committee was divided, with a tight vote of four to three opting to keep the key interest rate unchanged at 2.75%. This move caught traders off guard, who had largely bet on a rate hike. Economists in recent surveys had also leaned towards an expected increase.
New Zealand's inflation rate for the third quarter came in at 3.7%, a drop from the previous quarter's 4.1% and lower than anticipated. The central bank, targeting an inflation range of 1% to 3%, had already increased rates twice this year, in July and September, in response to the economic reverberations from the ongoing U. S.-Iran conflict.
Policymakers pointed out that global circumstances are adding to short-term inflation pressures in New Zealand. They noted that fuel prices have spiked due to disruptions in the global energy markets. The exchange rate has also dipped by about 3% since early September. As a net energy importer, New Zealand is vulnerable to external supply chain disruptions, with petrol, electricity, and international airfares contributing to price hikes in the three months leading to September.
The RBNZ's Monetary Policy Committee emphasized its aim to bring inflation back down to 2% over the medium term. They want to avoid reacting too strongly to temporary inflation spikes, which could lead to unnecessary economic instability.
After the central bank's decision, the likelihood of a rate hike at the RBNZ's final meeting of the year dropped significantly. Market expectations for a 25-basis-point increase in December plummeted to 40.8%, from nearly 75% just hours before.
Yields on New Zealand government bonds responded to the central bank's decision. The benchmark 10-year bond yield fell by 3 basis points, while the yield on the 2-year government bond, which closely aligns with central bank moves, declined by 11 basis points.
Currency strategists at BBH suggested that the RBNZ's less aggressive approach compared to other central banks is likely to keep the New Zealand dollar under pressure. Despite the split vote, all committee members maintained a bias towards tightening, acknowledging that new data in the coming weeks could significantly change the policy direction.
Jim Reid from Deutsche Bank commented on the markets' surprise at the RBNZ's move. He noted the decision ran counter to market pricing and economist forecasts, with a rate hike having been more than 90% priced in before the meeting. Policymakers highlighted easing headline inflation and a mixed economic recovery. However, they also signaled that further tightening might be needed to ensure inflation sustainably returns to 2%. The unexpected pause has added pressure to the New Zealand dollar.
