RBNZ Shocks Markets With 4-3 Vote To Hold OCR

The Reserve Bank has left the official cash rate unchanged at 2.75 percent in a split decision that defied near-universal expectations of a rise.

The Monetary Policy Committee (MPC) voted 4-3 to hold. Governor Anna Breman sided with the three external members of the MPC to keep the rate on hold; the other three members, all senior Reserve Bank officials, voted to raise it.

The decision surprised financial markets and economists, who had broadly expected a 25 basis point increase.

"Annual inflation is expected to increase to 4.4 percent in the December quarter, largely reflecting current futures prices for fuel. Near-term inflation forecasts are uncertain given volatility in prices for oil and refined fuels," the Reserve Bank said in a statement.

The committee was split on how seriously to treat that near-term pressure.

"All Committee members agreed on the overall outlook for inflation. However, members differed in how much weight they placed on various risks and the timing of the monetary policy response."

The Reserve Bank had signalled in its September statement that a pause was likely at this meeting while it assessed the impact of previous rate rises.

"The Committee agreed that tighter monetary policy is likely to be required but remains conditional on the economic outlook."

Weak household spending was a factor in the hold. "Subdued growth in household spending is limiting the ability of some firms to pass on higher costs to restore profit margins," the statement said.

"But the longer inflation remains high, the greater the risk of higher costs feeding into inflation expectations and price- and wage-setting behaviour, making inflation more persistent."

On the broader economy, the Reserve Bank said: "New Zealand's recovery could be stronger than expected but could also lose momentum if the global environment deteriorates or export strength does not flow through to jobs, incomes and household spending."

The global outlook, the bank said, was looking increasingly "fragile." Notes from the MPC meeting showed Breman and external member Prasanna Gai were particularly concerned about a rapid change in the global outlook and its potential impact on New Zealand.

National finance spokesperson Nicola Willis claimed some credit for the low rate.

"National's disciplined spending and economic management has helped bring the OCR down from the 5.5 percent Labour left behind."

"By stopping wasteful spending and getting the books back in order, we've eased government pressure on inflation and interest rates."

Willis warned that a coalition involving Labour, Greens, Te Pāti Māori, and Opportunity would put the economy at risk with greater spending and borrowing.

Infometrics Principal Economist Brad Olsen said the bank's tone was decidedly dovish.

"The Bank's tone was decidedly dovish, with a considerable amount of the Summary of Meeting dedicated to warning of various risks that could strike the domestic recovery or the global economy."

"In contrast, the inflation concerns were more muted than before or acknowledged to be 'as expected'."

ANZ chief economist Sharon Zollner called the decision a "close-run thing."

"Our view is that a 25bp hike today would have been the most prudent course, given the higher outlook for near-term inflation, resilience in activity indicators, the turn higher in Q3 core inflation measures."

"However, some Committee members felt it was more prudent to watch how developments unfold over the next six weeks before taking action - with an eye on downside risks to global growth, in particular."

Zollner said a December rate rise now looked the likely next step, and that the OCR would still rise to 3.5 percent with further hikes in February and March next year. ASB and Westpac economists also pencilled in a December rise; financial markets put a 75 percent chance on that.

The New Zealand dollar fell close to a cent against the US dollar in the minutes after the announcement, dropping to just under 56 US cents.