The New Zealand Dollar (NZD) experienced a sharp decline following the Reserve Bank of New Zealand's (RBNZ) latest policy meeting, where the central bank delivered its second consecutive 25 basis point rate hike but signaled a more cautious and gradual approach to future tightening. According to MUFG’s Lee Hardman, the kiwi failed to break above the 0.5900-level and weakened significantly despite the rate increase, as markets had anticipated a faster pace of tightening in response to rising energy prices over the summer [1].
RBNZ Governor Anna Breman emphasized the uncertainty regarding the timing of further Official Cash Rate (OCR) increases, stating, “It’s likely that there will be further increase in the OCR, but the timing is highly uncertain because we will consider the effects of the two hikes that we’ve done now, and also the new information that’s happening and how that is affecting the medium-term inflation outlook” [1]. The probability of another rate hike in October dropped to around 36%, down from 65% prior to the meeting, reflecting the market's disappointment with the central bank’s cautious guidance [1].
The RBNZ’s updated projections for the policy rate remained largely unchanged, with expectations for the policy rate to average 2.81% in Q4 and rise to 3.07% by the middle of next year. All committee members agreed that the central OCR projections were appropriate, though they acknowledged the possibility of further increases depending on economic conditions [1].
The RBNZ’s decision to stick to a gradual rate hike plan has dampened market expectations for more aggressive tightening, leading to a negative near-term outlook for the New Zealand Dollar [1].
CONCLUSION
The RBNZ’s cautious stance and unchanged rate projections have disappointed market participants who were expecting a faster pace of tightening. As a result, the New Zealand Dollar has weakened sharply, and the probability of an imminent rate hike has decreased significantly. Near-term kiwi strength is likely to remain subdued given the central bank’s gradual approach.