New Zealand central bank unexpectedly holds rates, signals likely hikes

[AUCKLAND] New Zealand’s central bank unexpectedly held its benchmark official cash rate at 2.75 per cent on Wednesday (Oct 28) by a narrow vote, but said that the committee agreed that tighter monetary policy is likely to be required, depending on the economic outlook.

In a Reuters poll, 22 of 27 economists had forecast that the Reserve Bank of New Zealand (RBNZ) would raise the cash rate by 25 basis points.

The New Zealand dollar dropped sharply to US$0.5590 from US$0.5676, and two-year swaps fell from a high of 4.1109 per cent to a low of 3.9497 per cent after the surprise decision.

Australian bank Westpac said it was the first time, outside the Covid pandemic, that the central bank held rates while markets had priced a more than 70 per cent chance of a hike.

The central bank has hiked the cash rate at its previous two meetings due to concerns inflation was sitting outside the central bank’s target range of 1 to 3 per cent.

However, the rate remains well below its peak of 5.5 per cent in August 2024, after the central bank embarked on a rapid easing cycle as the economy struggled and inflation eased.

The decision to hold was tight, with four members of the committee, including governor Anna Breman, voting to keep the cash rate steady, while three members wanted to hike the rate.

“All committee members agreed on the overall outlook for inflation. However, members differed in how much weight they placed on various risks and the timing of the monetary policy response,” the RBNZ said in the accompanying monetary policy review statement.

The central bank’s decision comes just 10 days before a close-fought general election in which the outlook for the economy and inflation remains a key issue for voters.

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“The Committee is focused on sustainably returning inflation to the 2 per cent target mid-point over the medium term, while avoiding unnecessary instability in output, employment, interest rates and the exchange rate,” the RBNZ said in the minutes of the meeting.

Eyes on economic recovery

New Zealand’s economy picked up in the second half of 2025, but the recovery stalled in the second quarter as fuel prices soared due to the US-Israeli war with Iran. The bank said that economic conditions remain uneven.

Committee members who voted to hold the cash rate wanted to allow the committee further time to assess the effects of the two recent cash rate increases and economic developments, minutes from the meeting said.

Those who supported an increase argued that acting now would guard against sustained inflation pressures and potentially reduce the risk of needing to do more later.

Sunny Nguyen, an economist at Moody’s Analytics, said that holding the cash rate raised the risk that the bank would fall behind.

She added: “Holding now raises the bar for December: If fuel prices stay high and inflation expectations drift higher, the bank may need to move then, and possibly by more than it would have if it had acted today.”

RBNZ did not release a full set of economic forecasts, but said global events are adding to near-term inflation pressures in New Zealand and annual inflation is expected to increase to 4.4 per cent in the December quarter. REUTERS