The Reserve Bank of New Zealand (RBNZ) delivered a dovish surprise with a 4-3 split vote to hold interest rates at 2.75%. Markets had widely anticipated a 25bp hike, but the central bank signaled uncertainty about a December rate increase. The Kiwi dollar reacted sharply, dropping around 1.4% following the announcement.
The RBNZ now expects inflation to reach 4.4% in the fourth quarter, higher than consensus forecasts. Despite this, the dovish faction, including Governor Anna Breman, emphasized downside risks to growth, particularly in household consumption and investment. They also downplayed the inflationary effects of a weaker currency, even as the trade-weighted exchange rate hit its lowest level since the global financial crisis.
While a December hike remains likely, markets are pricing in 22bp for December, 60bp by March, and 100bp by August 2027. Analysts view this pricing as overly aggressive, given the RBNZ's acceptance of a sharply negative real policy rate for multiple months. The outlook for the New Zealand dollar has dimmed, with analysts losing confidence in its outperformance against peers like the Australian dollar.
The NZD/USD sell-off has been deemed excessive relative to short-term rate differentials, but any relief rally is expected to be short-lived unless driven by broader USD weakness. The year-end target for NZD/USD remains 0.570, though downside risks have emerged. Analysts now see a break above 1.260 in AUD/NZD as imminent, following a stronger-than-expected Australian CPI print.