RBNZ surprises with 2.75% OCR hold in 4-3 split, flags possible tightening

Fuel is the key factor in the decision. The central bank projects that fuel will push inflation to 4.4% in the December quarter, yet the voting majority opted to set aside the immediate impact for now, wagering that soft demand will restrain pass-through. Because a move had been almost fully priced in, leaving the rate unchanged is expected to weigh on the New Zealand dollar and drag front-end yields down. The 4-3 split and the signal that tightening remains probable should keep December rate wagers from unwinding too far. The policy gap between the two countries has become pronounced. This morning's stronger Australian core inflation reading and Bullock's hawkish tone stand in contrast with the RBNZ's caution, suggesting AUD/NZD can push higher into the RBA's November 2-3 meeting. The RBNZ also flagged opaque AI financing and the possibility of an abrupt global slump, a dovish tail risk largely overlooked by markets.

---

Background:

• All 5 of New Zealand's major banks expected the RBNZ to raise rates to 3% on the day, but diverged on the eventual level.

• Preview: the OCR was set to rise to 3% before polling day, with oil and a softer kiwi adding to inflation.
• A majority of the NZIER Shadow Board backed a 25bp RBNZ increase to 3% as oil and a weaker kiwi took their toll.

---

The central bank stepped back from a move. With an increase nearly fully priced, four of seven officials chose to hold, wagering that soft demand would absorb the fuel shock, while leaving a December adjustment clearly possible.

Summary:

• The OCR stayed at 2.75% following a 4-3 decision. In favour of holding were Breman, Hansen, Williams and Gai; Gourley, Conway and Silk wanted an increase to 3%.
• Markets, which had assigned roughly 90% probability to a hike, and all five major New Zealand banks were caught off guard by the outcome.
• The majority pointed to third-quarter inflation of 3.7%, softer than anticipated, reduced pass-through from fuel, muted pay growth, anchored expectations and a sluggish domestic rebound.
• Fuel is expected to push annual inflation to 4.4% by the December quarter. Core inflation sits near the upper end of the 1% to 3% range, and the scope of price increases has widened.
• Greater financial stability risks were cited, among them opaque funding of certain AI projects, with a warning that a global downturn might arrive suddenly.
• Every member agreed further tightening is probable, though dependent on conditions. The next call, accompanied by fresh projections, takes place in December.

On Wednesday the Reserve Bank of New Zealand left the official cash rate at 2.75%, a surprise that wrong-footed markets and every major domestic bank, all of which had forecast a third consecutive hike. The Monetary Policy Committee was divided 4-3. The committee added that additional tightening remains probable, while stressing the timing is tied to the economic outlook.

Governor Anna Breman, Carl Hansen, Rebecca Williams and Prasanna Gai voted to hold. Hayley Gourley, Paul Conway and Karen Silk voted for a 25 basis point increase to 3%. Markets had priced roughly 90% odds of a hike before the decision, and ANZ, ASB, BNZ, Westpac and Kiwibank all expected one.

In the majority's view, the rate rises already delivered in July and September give the committee space to evaluate their impact. Headline CPI came in at 3.7% for the September quarter, down from 4.1% in June and below the central bank's forecast, with the knock-on effects of pricier fuel turning out smaller than expected. Those officials said pay growth is restrained, medium-run inflation expectations are firmly anchored, and there is little sign businesses have used higher input costs to expand margins. They also highlighted the possibility of only a tepid recovery in consumer spending and investment.

The dissenting members were more hawkish. In their telling, core inflation has exceeded levels appropriate to the target midpoint for an extended period, which makes it more likely that price-setting becomes stuck on an upward path while the Middle East conflict and expensive freight and shipping continue. With overall growth holding up, they contended that an immediate move would guard against persistent pressure and could lessen the need for bigger hikes later, so they supported a rise to about the midpoint of the neutral range.

Fuel still dominates the outlook. The RBNZ attributed the latest rise in fuel costs to continued disruptions across global energy markets, including lost capacity at refineries and shipping difficulties; the trade-weighted New Zealand dollar has also fallen around 3% since early September. Annual inflation is seen climbing to 4.4% in the December quarter, chiefly because of where oil futures currently sit, though the bank cautioned that near-term projections are especially uncertain when oil and refined fuel prices are swinging. Without vehicle fuels, annual inflation came in at 3.0%, while core measures have moved to near the top of the 1% to 3% target band. Price pressures have widened too, with 56% of the CPI basket by weight growing more than 3% over the past year.

The recovery at home is uneven. Regions with export exposure are seeing gains from high commodity prices, solid goods demand and rising tourist numbers, but consumption by households is still fragile, hiring is limited and house prices keep sliding. At an estimated 3.7%, the household saving rate is far above its 10-year average of 1%, indicating that consumers are still wary.

Rising international dangers also drew attention. Financial stability risks have ratcheted up since September, the committee said, pointing to high debt burdens and murky, complicated financing structures tied to some AI investments; it also cautioned that higher long-term rates may uncover weaknesses and that the global economy could turn down suddenly. Gai and Breman, two committee members, said this risk ought to enter calculations of the neutral rate -- the setting at which policy is neither supportive nor restrictive -- rather than relying on midpoint estimates.

The RBNZ stressed that the following decision could see rates move in either direction. Officials said the suitable stance could be revised by data arriving in the next six weeks. The case for another hike would strengthen should domestic price pressures fail to soften or spread further than ordinary costs and pass-through would warrant, while muted pressure could make it appropriate to stay put. A severe global downturn could even prompt easing.

The next policy decision is due alongside the December Monetary Policy Statement, which will bring updated projections. Breman is scheduled to hold a media briefing at 3pm New Zealand time, corresponding to 02:00 GMT.