RBNZ unexpectedly holds rates at 2.75% in split vote, signals further hikes likely

The Reserve Bank of New Zealand held its official cash rate at 2.75% on Wednesday, defying expectations for a 25-basis-point increase as policymakers weighed easing headline inflation against persistent underlying price pressures and an uneven economic recovery.

The Monetary Policy Committee voted 4-3 to keep the OCR unchanged, with three members favouring an increase to 3.00%. The decision followed two previous rate hikes as the central bank sought to contain inflation risks linked to higher global energy prices.

New Zealand’s benchmark NZX 50 index fell 0.5%, while the kiwi weakened sharply, with the NZD/USD pair dropping 1.4% after the RBNZ’s decision.

Annual consumer price inflation slowed to 3.7% in the September quarter from 4.1% in June, coming in below expectations for 3.8%. However, inflation remains above the RBNZ’s 1%-3% target band, while core inflation measures have climbed towards the upper end of that range and price increases have become more widespread.

The central bank expects annual inflation to rise to 4.4% in the December quarter, largely reflecting higher fuel prices amid disruptions to global energy supplies.

Further tightening remains on the table

Despite holding rates, the RBNZ indicated that further tightening is likely to be needed, although the timing will depend on how the economic outlook evolves. Policymakers remain focused on returning inflation sustainably to the 2% midpoint of the target band over the medium term.

The committee was divided over whether to raise rates immediately or wait for more evidence. Members favouring a hike argued that persistent core inflation and the risk of price pressures becoming embedded in wage- and price-setting behaviour warranted action.

Those favouring a hold said the previous two increases provided time to assess their effects, while subdued wage growth and stable medium-term inflation expectations supported a pause.

The central bank also warned that geopolitical tensions, elevated energy prices and potential global financial stress could undermine growth.

The RBNZ said a further increase could be warranted if domestic pricing pressures fail to ease or broaden beyond what higher costs would normally explain. Conversely, persistently weak demand or a sharp global downturn could alter the outlook and eventually require monetary easing.