NEW Zealand’s central bank held the cash rate steady at 5.5 per cent on Wednesday and trimmed the forecast peak for rates, catching markets by surprise as policymakers said the risks to the inflation outlook have become more balanced.

The decision was in line with expectations from 28 economists in a Reuters poll with all but one forecasting the Reserve Bank of New Zealand (RBNZ) would leave the cash rate at a 15-year high for the fourth consecutive meeting.

However, the central bank’s rate forecast track signaled a slightly more dovish outlook than some traders had anticipated, triggering a selloff in the New Zealand dollar and a rally in bonds.

The RBNZ lowered its forecast cash rate peak to 5.6 per cent from a previous projection of 5.7 per cent - effectively reducing the risk of further tightening - and continues to foresee a cut until mid-2025.

“Core inflation and most measures of inflation expectations have declined, and the risks to the inflation outlook have become more balanced,” the RBNZ statement said.

The market had priced in around a 23 per cent chance of a hike this week. The probability of a move by May more than halved to just 20 per cent, from 47 per cent before the announcement. while two-year swap rates dived to 5.035 per cent, from 5.195 per cent and the kiwi dollar was down almost 0.8 per cent at US$0.6122, breaking support around US$0.6152.

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ASB chief economist Nick Tuffley said that the tone of the statement was not as hawkish as could have been, with the risks now seen as more balanced as opposed to the upward skew noted in November’s statement.

“We think over coming months the hurdle for an OCR move in either direction remains high,” he said.

New Zealand’s annual inflation has come off in recent months and is currently running at 4.7 per cent with expectations that it will return to its target band of 1 per cent to 3 per cent in the second half of this year.

“Members agreed they remain confident that monetary policy is restricting demand. A further decline in capacity pressure is expected, supporting a continued decline in inflation,” the central bank’s minutes, which accompanied the policy statement, said.

A front-runner in withdrawing pandemic-era stimulus among its peers, the RBNZ has battled to curb inflation, lifting rates by 525 basis points since October 2021 in the most aggressive tightening since the official cash rate was introduced in 1999.

The rate hikes have sharply slowed the economy with recent data showing that it was tracking below previous central bank expectations. However, the unemployment rate in the fourth quarter of 2023 was slightly better at 4.0 per cent, compared with an expected 4.2 per cent rate. REUTERS