New Zealand's central bank made a surprising move on Wednesday, choosing to keep its benchmark cash rate unchanged at 2.75%. The decision came despite a narrow 4-3 vote among committee members, with Governor Anna Breman siding with the majority to hold rates steady. Markets had widely anticipated a 25-basis-point increase, as predicted by 22 of 27 economists in a Reuters poll.
The New Zealand dollar reacted sharply, dropping from $0.5676 to $0.5590, while two-year swaps fell from 4.1109% to 3.9497%. Westpac noted this was the first time, outside the COVID pandemic, that the central bank held rates despite markets pricing in a more than 70% chance of a hike.
The central bank has raised rates at its previous two meetings due to inflation concerns, but the current rate remains well below its peak of 5.5% in August 2024. The decision to hold was influenced by the need to assess the impact of recent rate hikes and economic developments, particularly the stalled recovery in the second quarter due to soaring fuel prices from the U.S.-Israeli war with Iran.
Committee members who voted to hold rates wanted more time to evaluate economic conditions, while those supporting a hike argued for preemptive action to guard against sustained inflation pressures. Moody's Analytics economist Sunny Nguyen warned that holding rates now could raise the bar for future hikes, potentially requiring more aggressive action later.
The Reserve Bank of New Zealand did not release full economic forecasts but noted that global events are adding to near-term inflation pressures. Annual inflation is expected to rise to 4.4% in the December quarter. The decision comes just 10 days before a closely watched general election, where economic and inflation outlooks are key issues for voters.