What could the RBNZ’s monetary policy decision deliver?

Markets have fully priced in an RBNZ rate hike, with the OCR expected to reach 3%.
Further tightening remains supported by New Zealand’s elevated inflation rate of 3.7%.
For NZD/USD, 0.5748–0.5769 marks the resistance zone, while key support lies at 0.5600.

Money markets are assigning a 100% probability to a 25 basis point increase in the Overnight Cash Rate (OCR), from 2.75% to 3%. The Reserve Bank of New Zealand (RBNZ), headed by Governor Anna Breman, is expected to announce the move on Wednesday, 28 October at 01:00 GMT.

TMGM Analysis: Financial Market News, Economic Calendar & Market Insights

With a rate hike priced at 100%, what will RBNZ guidance signal?

The expected move would mark the RBNZ’s third rate increase, with markets assigning nearly 50% odds to a further hike in December.

At its September meeting, the Committee unanimously agreed to raise the OCR and withdraw monetary stimulus, aiming to bring inflation towards the 2% target while supporting growth and the labour market. The decision sought to limit the risk of more aggressive rate changes later, while leaving the Committee open-minded about future OCR adjustments.

A further increase would notably take the OCR nearer the RBNZ’s neutral range. Speaking at the press conference after the decision, Governor Breman said the committee was taking rates towards neutral while keeping policy accommodative.

Breman also indicated that another OCR increase was likely and that the impact of rate hikes already delivered would be assessed.

Taken together, these signals point to a central bank inclined to raise rates further, although the timing is still unclear.

The latest economic releases also indicate room for additional rate hikes. New Zealand’s Q2 GDP growth came in at 2.6% YoY, exceeding the 2.3% forecast. Q3 CPI inflation, by contrast, eased to 3.7% YoY, below the 3.8% expected, yet remained above the RBNZ’s 2% inflation target.

How could NZD/USD react?

NZD/USD is currently trading comfortably near the lower end of the day’s 0.5675-0.5708 range. Traders are awaiting a two-stage market reaction, with the Federal Reserve’s decision also on their radar.

A hawkish stance from the RBNZ could lift the pair towards the convergence of its 50-day and 100-day Simple Moving Averages (SMAs), at 0.5748 and 0.5769, respectively. A break above that zone would make a further advance towards 0.5800 likely.

Conversely, a dovish RBNZ signal could open the way for tests of 0.5650 and the psychologically significant 0.5600 level. Traders are defending the latter after the pair spent at least 14 days trading on either side of it. Further losses would bring the year-to-date (YTD) low of 0.5564 into focus.

RBNZ: Frequently asked questions

What role does the Reserve Bank of New Zealand play?

As New Zealand’s central bank, the Reserve Bank of New Zealand (RBNZ) has economic objectives of securing and preserving price stability and supporting maximum sustainable employment. Price stability is achieved when inflation, as measured by the Consumer Price Index (CPI), is within the 1% to 3% band.

How does the New Zealand Dollar respond to the Reserve Bank of New Zealand’s monetary policy?

Setting the Official Cash Rate (OCR) at a level consistent with its objectives is the responsibility of the Reserve Bank of New Zealand’s (RBNZ) Monetary Policy Committee (MPC). If inflation exceeds the target, the bank seeks to contain it through an increase in the OCR. This raises borrowing costs for households and businesses, cooling economic activity. The New Zealand Dollar (NZD) generally benefits from higher interest rates, as the resulting rise in yields makes the country more attractive to investors. Lower interest rates, in contrast, tend to put downward pressure on NZD.

Why is employment a focus for the Reserve Bank of New Zealand?

A tight labour market can add to inflation, making employment an important consideration for the Reserve Bank of New Zealand (RBNZ). The bank defines its goal of “maximum sustainable employment” as the greatest utilisation of labour resources that can be maintained over time without accelerating inflation. The bank explains: “When employment is at its maximum sustainable level, there will be low and stable inflation. However, if employment is above the maximum sustainable level for too long, it will eventually cause prices to rise more and more quickly, requiring the MPC to raise interest rates to keep inflation under control,”

How does Quantitative Easing (QE) work?

Quantitative Easing is a monetary policy tool that the Reserve Bank of New Zealand (RBNZ) can deploy in extreme circumstances. Under QE, the RBNZ prints local currency to purchase assets, usually government or corporate bonds, from banks and other financial institutions. The aim is to expand the domestic money supply and stimulate economic activity. A weaker New Zealand Dollar (NZD) is usually the result. The bank turns to QE as a last resort when interest rate cuts alone are unlikely to meet its objectives. The RBNZ deployed this tool during the Covid-19 pandemic.