In late October, the Reserve Bank of New Zealand chose patience over action, keeping its cash rate at 2.75% when many had expected a rise. The decision was a narrow one, with four members of the committee judging that the economy needed time to absorb recent increases, and three believing that inflation pressures were already too persistent to wait on. It is the kind of quiet fork that central banks face when the forces of fuel, confidence and household spending pull in different directions, and it leaves the country's currency and borrowers holding their breath until December.
Reserve Bank Holds OCR at 2.75% in 4-3 Split; Dollar Slides as Markets Had Priced a Hike
The hold raises the bar for December.
Mark
The market was nearly certain of a hike. Why does a hold move the dollar so sharply?
Mimi
Because a 90% pricing meant the hike was already built into the exchange rate. When it didn't come, the currency fell from US56.78c to US55.87c within moments.
Mark
The vote was four to three. How close is that?
Mimi
As close as a nine-seat... well, a seven-member committee can get without a tie. Governor Breman was on the hold side, along with Hansen, Williams and Gai.
Luke
Worth noting the committee agreed on the outlook itself. The split was over risk weighting and timing, not over whether inflation is a problem.
Mark
What did the hold side actually argue?
Mimi
That two recent increases still need time to work, that inflation came in lower than expected, and that a weak recovery in household spending and investment is a real risk.
Mark
And the three who wanted a hike?
Mimi
Gourley, Conway and Silk said core inflation has been too high for too long, and moving now might avoid doing more later.
Luke
Nguyen's warning that December could bring a bigger move is one economist's reading. The committee only said tighter policy is likely and conditional on the outlook.
Mark
So what decides December?
Mimi
Mostly fuel. The 4.4% December-quarter forecast rests on current futures prices, and the committee itself called near-term forecasts uncertain.
Luke
Right, so that figure could shift as oil does. Nothing here confirms a December hike.
Der Puls
- Markets had braced for a hike and were jolted when the Reserve Bank held the cash rate steady at 2.75%.
- The New Zealand dollar slid from US56.78c to US55.87c within moments of the announcement.
- A 4-3 split vote exposed a sharp disagreement over whether to act now or let recent rate rises work.
- Fuel-driven inflation is forecast to climb to 4.4% in the December quarter, tightening the pressure on policymakers.
- The committee has signalled tighter policy is likely, with a possibly larger move in December if fuel prices stay high.
In late October, the Reserve Bank of New Zealand chose patience over action, keeping its cash rate at 2.75% when many had expected a rise. The decision was a narrow one, with four members of the committee judging that the economy needed time to absorb recent increases, and three believing that inflation pressures were already too persistent to wait on. It is the kind of quiet fork that central banks face when the forces of fuel, confidence and household spending pull in different directions, and it leaves the country's currency and borrowers holding their breath until December.
The Reserve Bank of New Zealand stood at a crossroads and chose to wait. Economists and markets had largely expected a 25 basis point increase to the Official Cash Rate, and traders had priced in a 90% chance of one. Instead, the bank held the rate at 2.75%, and the New Zealand dollar dropped from US56.78c to US55.87c in the minutes that followed.
The decision was far from unanimous. Governor Anna Breman, Carl Hansen, Rebecca Williams and Prasanna Gai argued for patience. Two recent rate rises, they said, had yet to show their full effect, and actual inflation had come in lower than forecast, with fuel's indirect effects proving smaller than feared. Their greater worry was a fragile recovery, particularly in household spending and investment.
Hayley Gourley, Paul Conway and Karen Silk saw matters differently. Core inflation had sat above levels consistent with the target midpoint for some time, and they wanted to act now to guard against entrenched pressure and avoid harder moves later.
All members agreed that annual inflation is expected to rise to 4.4% in the December quarter, largely because of fuel futures. The committee also acknowledged that more tightening is likely to be needed, though this depends on how the economy unfolds. Analysts such as Sunny Nguyen of Moody's Analytics called the hold a surprise, noting that oil had rebounded and the currency had weakened since September. Holding now, Nguyen suggested, may leave the bank facing a bigger step in December if fuel prices stay high and inflation expectations drift upward.
Within moments of the Reserve Bank of New Zealand's announcement, the New Zealand dollar dropped from US56.78c to US55.87c. The bank had left the Official Cash Rate at 2.75%. Economists had expected a 25 basis point increase, and markets had priced in a 90% chance of one.
The decision was not unanimous. The Monetary Policy Committee voted four to three to hold. According to the record of the meeting, all members agreed on the overall inflation outlook. Annual inflation is now expected to rise to 4.4% in the December quarter, largely because of current futures prices for fuel. The committee noted that near-term forecasts are uncertain given volatility in oil and refined fuel prices.
Where the members split was on how much weight to give various risks, and on when to respond. Governor Anna Breman, Carl Hansen, Rebecca Williams and Prasanna Gai favoured holding. They pointed out that the two recent OCR increases give the committee more time to judge their effects and to watch the economy develop. They also said actual inflation had come in lower than expected, reflecting smaller indirect effects from higher fuel prices. In their view, medium-term inflation expectations and wage growth remain consistent with returning inflation to the target midpoint.
These four put the risk of a weak recovery front and centre, particularly in household consumption and investment. They preferred to pause at this meeting and assess demand and financial conditions.
Hayley Gourley, Paul Conway and Karen Silk wanted a 25 basis point rise now. They stressed that core inflation has sat above levels consistent with headline inflation at the target midpoint for some time. Acting now, they said, would guard against sustained inflation pressures and could reduce the risk of needing to do more with interest rates later.
Moody's Analytics economist Sunny Nguyen called the hold a surprise given how the backdrop had shifted since September. Oil prices had rebounded and the New Zealand dollar had weakened. The September-quarter CPI also showed price pressures broadening, even as headline inflation eased.
The committee did signal that more increases are coming. It agreed that tighter monetary policy is likely to be required, though that remains conditional on the economic outlook. Nguyen said holding now raises the bar for December. If fuel prices stay high and inflation expectations drift upward, the bank may need to move then, and possibly by more than it would have if it had acted this time.
Bemerkenswerte Zitate
The committee agreed that tighter monetary policy is likely to be required but remains conditional on the economic outlook.— Monetary Policy Committee record of meeting
Holding now raises the bar for December, and the bank may need to move then, possibly by more than if it had acted today.— Sunny Nguyen, Moody's Analytics (paraphrased)
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