The New Zealand dollar experienced a steep decline on Wednesday following an unexpected decision by the Reserve Bank of New Zealand (RBNZ) to keep interest rates steady. By 8 a.m. ET, the currency dropped by 1.3% against both the U.S. and Australian dollars and fell more than 1% against the British pound, Japanese yen, and euro. Compared to six months ago, the New Zealand dollar is down nearly 5% against the greenback.
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The RBNZ's Monetary Policy Committee voted 4-3 to maintain its key interest rate at 2.75%, despite market expectations for a rate hike, which had been seen as nearly certain. Economists surveyed by Reuters also predicted an increase. In the third quarter, New Zealand's annual inflation rate registered at 3.7%, down from 4.1% in the previous quarter and below forecasts.
The central bank has already raised rates twice this year, in July and September, in response to economic impacts linked to the U.S.-Iran conflict. In a statement, policymakers indicated that global events are contributing to inflationary pressures in New Zealand. They noted rising fuel prices due to ongoing disruptions in global energy markets and a 3% fall in the exchange rate since early September. As a net importer of energy, New Zealand is particularly susceptible to external energy supply shocks, leading to increased prices for petrol, electricity, and international airfares.
The RBNZ aims to return inflation to 2% over the medium term while attempting to avoid unnecessary economic instability. Following the central bank's decision, market bets on a rate hike at the RBNZ's final meeting of the year significantly diminished, with chances of a 25-basis-point increase in December falling to 40.8%, down from nearly 75% earlier on Wednesday. Yields on New Zealand government bonds also declined, with the benchmark 10-year bond yield decreasing by 3 basis points and the 2-year bond yield falling by 11 basis points.
Currency strategists at BBH observed that the RBNZ's less aggressive stance compared to other central banks is likely to keep the New Zealand dollar 'on the defensive.' Despite the split vote, all members maintained a tightening bias, but acknowledged that upcoming data over the next six weeks could significantly influence their policy stance. Deutsche Bank's Jim Reid noted that the RBNZ's decision surprised markets, contradicting previous expectations for a rate hike, while also indicating that further tightening may be necessary to ensure inflation reaches sustainable levels.