RBNZ Comments Dampen Market Expectations of a Big Rate Hike

The Reserve Bank of New Zealand (RBNZ) Assistant Governor Christian Hawkesby said in a speech that amid uncertainty, when the risks are evenly balanced, “central banks globally tend to follow a smoothed path and keep their policy rate unchanged or move in 25 basis point increments.”

The New Zealand dollar last traded 0.2% weaker at $0.7015, having touched a three-week low of $0.7000 earlier in the session in response to the RBNZ comments. One-year swap rates dropped to 1.07% from 1.15%.

The RBNZ is meeting on Oct. 6 to review its monetary policy settings. The bank held off raising the official cash rate (OCR) in August, despite inflationary pressures rising, after a new outbreak of the Delta variant of the coronavirus.

“The RBNZ stressed today that in times of uncertainty, a measured policy approach is appropriate…,” ANZ Bank Chief Economist Sharon Zollner said in a statement.

“We never thought a 50bp move was a likely start to the hiking cycle; this confirms it. Our OCR forecast is unchanged, with 25bp hikes to come in October and November, with steady hikes thereafter taking the OCR to 1.5% by August next year,” she said.

In his speech that used indigenous Maori reference throughout, Hawkesby said the more adaptable white heron is a more fitting metaphor to describe the central bank’s approach to monetary policy decisions in times of uncertainty than the traditional “hawk” that signals higher interest rates or “dove” signalling lower rates.

Hawkesby said that the bank’s “least regrets” approach taken during the COVID-19 crisis required it to be adaptable, sometimes moving with caution in slow, small steps, and other times moving with confidence, quickly and in large steps to remain successful.

“We are in a good position to navigate the period ahead, with the labour market operating at maximum sustainable employment, inflation expectations well-anchored at our target, and financial markets functioning well,” Hawkesby added.

For a look at all of today’s economic events, check out our economic calendar.

(Reporting by Sameer Manekar in Bengaluru; Editing by Chris Reese and Ana Nicolaci da Costa)