The New Zealand dollar dropped sharply on Wednesday after the country's central bank chose to keep interest rates unchanged, defying market expectations of a hike. By 8 a.m. ET, the currency had fallen 1.3% against the U.S. and Australian dollars, and over 1% against the British pound, Japanese yen, and euro. The Reserve Bank of New Zealand's Monetary Policy Committee voted 4-3 to maintain the key rate at 2.75%, despite widespread forecasts for a rate increase.
The decision came as New Zealand's annual inflation rate slowed to 3.7% in the third quarter, down from 4.1% previously. The central bank, which targets inflation between 1% and 3%, had raised rates twice this year, citing the economic impact of the U.S.-Iran war. Policymakers noted that global events, including rising fuel prices and a weaker exchange rate, were contributing to inflation pressures.
Markets had priced in a near-certain rate hike, with economists overwhelmingly expecting an increase. However, the central bank emphasized its goal of returning inflation to 2% over the medium term while avoiding unnecessary economic instability. The unexpected pause led to a sharp drop in bets on a December rate hike, with markets now pricing in only a 40.8% chance of a 25-basis-point increase.
Currency strategists at BBH noted that the RBNZ's less hawkish stance compared to other central banks would likely keep the New Zealand dollar under pressure. Deutsche Bank's Jim Reid highlighted the surprise decision, which contrasted with market pricing and economist expectations. The unexpected pause weighed heavily on the New Zealand dollar, which has lost nearly 5% against the U.S. dollar over the past six months.