RBNZ’s Split Vote to Hold Sends Kiwi Higher on Rate Hike Bets

The Reserve Bank of New Zealand (RBNZ) headquarters, left, stands in Wellington, New Zealand, on Thursday, Aug. 9, 2018. New Zealand's central bank said it expects to keep interest rates at a record low for another two years as the outlook for economic growth weakens. Photographer: Birgit Krippner/Bloomberg Photo by Birgit Krippner /Bloomberg

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(Bloomberg) — New Zealand’s central bank kept interest rates unchanged in a split decision that was only resolved by the Governor’s casting vote. 

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The currency jumped as the division bolstered bets on a rate-hike for the next meeting and as the RBNZ’s new forecasts indicate the chance of at least two 25 basis-point hikes before the end of this year. The Reserve Bank’s Monetary Policy Committee kept the Official Cash Rate at 2.25% on Wednesday. 

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“On balance, the OCR will most likely need to increase sooner and by more than envisaged in the February Monetary Policy Statement,” the RBNZ said in its post-meeting release. “The pace of OCR increases will depend on the relative influence of persistent wage- and price-setting behavior versus weaker economic activity on medium-term inflation pressures.”

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The New Zealand dollar rose as much as 0.7% after the announcement and bought 58.36 US cents at 2:45 p.m. local time. The yield on a policy sensitive two-year government note climbed 6 basis points to 3.55%. The chance of a July rate hike increased to around 90% while a September move is fully priced, swaps data show. 

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Surging fuel costs are projected to drive inflation well beyond the top of the RBNZ’s 1-3% target range, justifying rate hikes ahead to prevent price pressures from becoming embedded in the economy. But the central bank is also wary given high fuel prices will squeeze discretionary spending and damp business confidence, weighing on hiring and domestic demand.

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The six-person committee reached an impasse after a split 3-3 vote, meaning Governor Anna Breman’s casting vote carried the day in favor of a hold.

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The three external members of the committee — Carl Hansen, Hayley Gourley and Prasanna Gai — favored a hike, arguing that price increases could become more broad-based, feeding through to a greater risk of second-round price pressures, according to the Record of Meeting. These members noted that two-year inflation expectations have risen across a range of surveys.

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“These members judged that removing stimulus now, while observing domestic economic developments, would help reduce medium-term inflation risks,” the RBNZ said. “Moving earlier was viewed as preferable, given upward pressure on neutral rates and that it may also limit the overall magnitude of the increase in the OCR and the negative impact on output.”

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The three RBNZ officials who favored no change said core inflation and wage growth remain contained and spare capacity in the economy is likely to damp second-round inflationary pressures, the RBNZ said.

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Forward Guidance

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The RBNZ’s forward guidance shows the average OCR rising to 2.51% in the third quarter. That implies a strong chance of a rate hike. It forecasts the average OCR will be 2.84% by the end of the year and 3.07% by mid-2027.