The RBNZ left the OCR at 2.75% in a 4:3 vote, surprising markets that had nearly fully priced a 25bp hike. The committee still sees higher rates eventually, but members differ on timing. Westpac expects a December hike and says it is not a done deal.
The Reserve Bank of New Zealand left the OCR unchanged at 2.75%, a shock to markets and most analysts. Markets had nearly fully priced a 25bp rate hike, according to Westpac's review.
A 4:3 vote to pause
The decision went to a vote that split 4:3 in favour of no change. Breman, Hansen, Gai and Williams made the case for waiting, arguing that the two recent OCR increases warranted more time to assess their effects.
The majority pointed to weaker-than-expected Q3 inflation, smaller-than-anticipated indirect effects from higher fuel prices, stable inflation expectations and subdued wage growth. They also stressed downside risks to the recovery, including weak household consumption and investment.
Silk, Gourley and Conway took the hawkish side. They put greater weight on the persistence of underlying inflation and argued that tightening now would reduce the risk of needing to do more later, Westpac wrote.
Global risks and a weaker kiwi
The RBNZ seems more concerned about risks to the global outlook, Westpac noted. The central bank cited geopolitical events, high energy prices, and high and rising public and private debt levels as downside risks to global growth.
The exchange rate adjusted sharply lower on the day. NZD/AUD moved to a new cycle low of around 0.7980 at the time of writing, Westpac said. Strong CPI data in Australia and hawkish RBA commentary added to the pressure.
Westpac still sees a December hike
Westpac expects a 25bp hike in December and an eventual peak OCR of 4% in September next year. It cautions, however, that a December move is not a done deal.
The outcome will depend on data on fuel prices, inflation expectations and second-round pricing pressures. The RBNZ's next policy review is on 9 December, when it will publish a full Monetary Policy Statement and refreshed forecasts.
Westpac also flags the General Election on 7 November as a possible influence on views about the path of monetary policy.
Source: ActionForex
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