New Zealand Central Bank Torn Between Holding Rates and a 25-Basis-Point Hike

In Brief: Paul Conway, senior economist at the Reserve Bank of New Zealand, said the late-October rate decision is "wide open," and the bank can choose between holding rates or raising them by 25 basis points. The central bank still sees a rate hike as more likely than a cut, but has not decided on timing. Conway said a hike […]

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Bank of New Zealand chief economist Paul Conway said the bank's next interest rate decision in late October was "wide open". However, he reiterated that the central bank still sees an increase in the official cash rate (OCR) as more likely than a decrease.

On the sidelines of the International Monetary Fund and World Bank meetings in Bangkok, Conway said the bank wants to keep the option to choose between keeping interest rates steady and increasing them by 25 basis points. According to him, the central bank still believes that the next move of the OCR will be an increase, but has not yet decided on its timing.

He added that recent changes in oil prices and the New Zealand dollar have increased inflationary pressures in the short term. However, the central bank is still confident that inflation will return to the target range of 1-3% next year.

Conway's comments make the October decision seem imminent and uncertain. Describing the upcoming meeting as a "completely open" decision, he did not commit the bank to a rate hike; But his re-emphasis on the tendency towards contractionary monetary policy shows that rate cuts are not on the agenda. This approach gives the central bank the opportunity to review new data, including inflation statistics, before announcing the decision.

The Bank of New Zealand's stance against changing expectations in other regional economies stands out. In Australia, weaker employment data released on Thursday led traders to downplay the prospect of an interest rate hike at the country's central bank's November meeting; This probability reached about 15%. In the United States, the publication of higher-than-expected inflation data led the markets to price in the high probability of a Federal Reserve interest rate hike in December.

Conway's comments could support the New Zealand dollar against currencies where interest rate expectations are falling; Especially the Australian dollar after the publication of the country's weak employment statistics. In such a situation, the AUDNZD currency pair could reflect the difference between the easing approach of the central bank of Australia and the still contractionary stance of the central bank of New Zealand.

As the central bank of New Zealand did not commit to its decision, the market is expected to remain sensitive to the country's next economic data and reassess the possibility of rate stabilization or hike ahead of the meeting. The tendency towards contractionary policy can also limit the scope of further decline in New Zealand bond yields in the short term.

The key question for the late October meeting is whether short-term pressures from energy and currency changes will be serious enough to justify a rate hike now, or whether the Bank's confidence that inflation will return to its target range next year will allow it to wait a little longer.