Both economies face the same fuel shock, but Bullock treats it as a reason for concern, while the RBNZ majority is betting weak demand will contain it. That difference in reaction is what drives the divergence. A widening gap in expected rates generally supports AUD/NZD, and a hike from the RBA next week, with the RBNZ waiting until December, would extend it. The main risk to the move is the RBNZ’s 4-3 split: hawkish signals from Breman at the press conference, or a firm December hike signal, could pull the cross back quickly. A softer tone from the RBA next week would do the same. Further gains in crude would test both banks, but the RBA currently looks the more willing to respond.
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Earlier:
- RBNZ holds OCR at 2.75% in surprise 4-3 vote, says tighter policy still likely
- Australia trimmed mean CPI rises to 3.7%, above forecasts, as RBA hike case firms
- RBA’s Bullock: oil shock means inflation above August forecasts, Board meets next week
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Within 90 minutes, Australia signalled it may need to tighten further and New Zealand decided to wait, and AUD/NZD is where that divergence shows up.
Summary:
- RBA Governor Bullock said inflation will likely exceed the RBA’s August forecasts on higher energy prices and a tighter labour market, ahead of the November 2 and 3 meeting.
- Australia’s Q3 trimmed mean rose to 3.7% y/y, above the 3.6% expected, and September headline inflation climbed to 4.3%.
- The RBNZ held the OCR at 2.75% in a 4-3 vote, surprising markets and all five major NZ banks, which expected a hike.
- The RBNZ said tighter policy is likely but conditional, with the next decision and new forecasts due in December.
- Diverging rate expectations generally favour AUD/NZD, though the RBNZ’s split vote and its 4.4% December inflation forecast limit how far the gap can widen.
- The next tests are Breman’s media conference at 02:00 GMT and the RBA decision next week.
Australia and New Zealand delivered sharply contrasting policy signals within 90 minutes on Wednesday, putting AUD/NZD in focus as a hawkish turn from the Reserve Bank of Australia met a surprise hold from the Reserve Bank of New Zealand.
The Australian side leaned hawkish. RBA Governor Michele Bullock told a Senate committee that inflation is likely to run higher than the central bank forecast in August, citing a renewed surge in energy prices from the Middle East conflict and a labour market that looks a little tighter than previously judged. She said a key question for next week’s Board meeting is whether the 100 basis points of tightening delivered this year will be enough. Minutes later, September quarter data showed the RBA’s preferred trimmed mean inflation measure rising to 3.7% year on year, above the 3.6% expected, while monthly headline inflation climbed to 4.3% in September.
New Zealand went the other way. The RBNZ held its official cash rate at 2.75% in a 4-3 vote, against market pricing of around 90% for a hike and forecasts from all five major local banks. The majority, including Governor Anna Breman, said the two hikes already delivered give the committee time to assess their effects, pointing to lower-than-expected headline inflation of 3.7%, smaller pass-through from fuel costs, subdued wages and a fragile domestic recovery. The committee still said tighter policy is likely to be required, but made it conditional on the outlook.
The result is a widening gap in rate expectations between the two central banks. Markets are likely to lift the odds of an RBA hike on November 2 and 3, while pushing back expectations for the next RBNZ move to the December Monetary Policy Statement at the earliest. Because AUD/NZD tends to track the difference between Australian and New Zealand short-term interest rates, that shift in relative expectations generally favours the Australian dollar against its New Zealand counterpart.
There are limits to how far the divergence can run. The RBNZ vote was split, all members agreed tighter policy is likely, and its December forecast of 4.4% inflation leaves room for a hike if fuel pass-through picks up. The RBA, for its part, has not committed to a move, and the softer weighted median reading in today’s CPI gives it some room to wait. Both economies are also exposed to the same oil shock, which pushes up inflation on both sides of the Tasman.
The next tests are Breman’s media conference at 02:00 GMT, where any hint of a December hike could narrow the gap, and the RBA decision next week, which comes with updated forecasts showing how far it has revised its inflation outlook.
This article was written by Eamonn Sheridan at investinglive.com.