RBNZ Rate Hike Fails to Boost NZD as Dovish Tone Prevails

The Reserve Bank of New Zealand (RBNZ) raised its Official Cash Rate by 25 basis points to 2.75% on Wednesday, but the move was seen as dovish and did not boost the New Zealand dollar.

The central bank cited accelerating annual CPI inflation at 4.1%, mainly due to higher fuel prices tied to the conflict in the Middle East. However, underlying inflationary pressures remain weaker, with core inflation, wage growth, and inflation expectations consistent with headline inflation returning to the 1-3% target range by mid-2027.

The RBNZ believes New Zealand's economic recovery has resumed after weak growth in Q2 and expects activity to broaden gradually, supported by resilient external demand and strong export prices. However, domestic conditions remain weaker, with subdued household spending, elevated unemployment, job insecurity, and weak house prices weighing on consumption and residential investment.

The central bank emphasized a gradual approach and the temporary nature of the inflation shock, reducing expectations that the OCR could rise toward 4%. As a result, the New Zealand dollar weakened sharply after the announcement, losing almost 1.0% against the U.S. dollar.