New Zealand's central bank surprised financial markets on Wednesday 28 October by holding its official cash rate steady at 2.75%, defying expectations of a further increase. The Reserve Bank of New Zealand's monetary policy committee voted 4 to 3 to hold, even though markets had put the probability of a hike at about 95%. Governor Anna Breman was effectively the casting vote, preferring to watch how two earlier increases, in July and September, work through the economy before moving again.

A 4-3 split, and a falling kiwi dollar

The New Zealand dollar fell by close to one US cent on the decision, dropping to just above 56 US cents, before consolidating. Breman told reporters the bank still expects further increases, saying “we do think that we will see further OCR increase because of what we are seeing in inflation,” with another decision due in December alongside fresh economic forecasts. Annual consumer price inflation slowed to 3.7% in the September quarter from 4.1% in June, but the bank projects it rising to 4.4% in the December quarter, driven largely by higher fuel prices.

Hikes still likely, just not today

The pause comes with New Zealand's economy showing signs of recovery but unemployment still near an 11-year high and growth uneven across regions and industries. Some committee members felt it more prudent to watch developments over the next six weeks, with an eye on downside risks to global growth, including the unresolved war in the Middle East. The decision also lands days before New Zealand's election on 7 November; Breman said the election was not a factor in the call.

Sources: Morningstar (Dow Jones) and AAP.