Breman’s guidance partly reverses the dovish read of the hold. Signalling likely hikes at coming meetings, possibly into restrictive territory, should push December pricing back up, support front-end yields and help the New Zealand dollar recover some of its losses. Her explicit worry about a weak currency feeding imported inflation acts as a soft floor for the kiwi, since further falls make a hike more likely. Oil is the main swing factor: fuel is already lifting inflation toward 4.4%, so higher crude, especially if a US strike on Iran escalates after the midterms, would make a December hike much more likely. The guidance also narrows the policy gap with the RBA, which may cap AUD/NZD after this morning’s divergence.
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The RBNZ held, then Breman spent the press conference telling markets not to read too much into it: more hikes are likely, and they may go further than planned.
Summary:
- RBNZ Governor Anna Breman said further rate increases are likely at coming meetings, and tightening might be needed even into restrictive territory.
- The committee agreed tighter policy is likely, conditional on the economy, and discussed whether rates could rise further than its projected OCR path.
- Breman said the committee is concerned that a sustained fall in the NZ dollar could add to imported inflation.
- She said the decision was based on the economic outlook, though the committee did look at market pricing, and that wage growth remains below levels consistent with the inflation target.
- The committee discussed the risk of a correction in AI-related market assets.
- Partial inflation indicators and labour data will be important ahead of the December Monetary Policy Statement.
Reserve Bank of New Zealand Governor Anna Breman said further interest rate increases are likely at coming meetings and could take policy into restrictive territory, sounding a more hawkish note at her media conference hours after the central bank surprised markets by holding its official cash rate at 2.75%.
Breman said the Monetary Policy Committee agreed that tighter policy is likely to be required, conditional on how the economy evolves. She said it is likely the RBNZ will deliver further rate increases at upcoming meetings, and that additional tightening might be needed even into restrictive territory, meaning rates high enough to actively slow the economy rather than simply removing stimulus. She also said the committee discussed whether rates could need to rise further than its existing projected path for the OCR.
The currency featured prominently. Breman said the committee discussed the decline in the New Zealand dollar and is concerned that, if the currency remains weak, it could add to imported inflation. The RBNZ’s statement noted that the trade-weighted exchange rate has fallen around 3% since early September, at a time when fuel prices have risen further because of disruptions in global energy markets.
Breman explained the decision to hold rather than hike in terms of the economic outlook, while acknowledging the committee did look at market pricing, which had priced roughly a 90% chance of a hike. She said conditions for returning inflation to target remain favourable, pointing to wage growth running below levels consistent with inflation at the 2% midpoint. That echoed the majority view in the committee’s 4-3 vote, which argued the two recent hikes give it time to assess their effects.
The governor also said the committee discussed the risk of a correction in AI-related market assets, building on the RBNZ’s warning that financial stability risks have increased because of high debt and opaque financing arrangements for some AI investment.
Looking ahead, Breman said partial inflation indicators and labour market data in the coming weeks will be important for the committee’s assessment. The next decision is due with the December Monetary Policy Statement, which will include updated forecasts and a new projected path for the OCR.
The press conference left markets with a mixed message: a decision that leaned dovish, and guidance from the governor that leaned hawkish. With a minority already pushing for a hike and Breman now signalling increases are likely, December is shaping up as a live meeting, particularly if fuel prices stay high and the currency remains weak.
This article was written by Eamonn Sheridan at investinglive.com.