The Reserve Bank of New Zealand (RBNZ) voted to hold interest rates on Wednesday, which was no surprise to the markets. The central bank voted to maintain the cash rate at 2.25% for a third meeting, its lowest level since May 2022.
Split Vote Reflects Deep Uncertainty, Markets Eye July Hike
The RBNZ decision was a split vote, with three members of the Monetary Policy Committee (MPC) voting to hold rates and three members in favor of raising rates by 25 basis points. RBNZ Chair Anna Berman’s used her casting vote to hold the cash rate.
The split decision revolves around whether inflation will drop back into the RBNZ’s target of 1%-3% under the current cash rate. The MPC policy statement warned that rates will have to rise, noting that the Middle East conflict had led to higher fuel prices and had slowed the economic recovery.
The Bank is facing a balancing act – if it leaves the cash rate too low for too long, inflation could jump and force the Bank to hike more aggressively. On the hand, raising rates too early as a negative effect on economic growth. The markets are betting on a rate hike as soon as July, with a strong likelihood of rate hikes at every meeting this year and into 2027.
Australia’s Inflation Eases, June Hike Unlikely
Australia’s consumer price index (CPI) eased to 4.2% year-on-year in April from 4.6% in March. This was lower than the market estimate of 4.4%. Monthly, CPI plunged to 0.4% in April, down from 1.1% a month earlier and below the market estimate of 0.6%. Much of the decline was due to lower gasoline prices after a fuel tax was cut sharply on April 1.
The RBA’s preferred core inflation rate, Trimmed Mean CPI, showed little movement, coming in at 3.4% year-on-year in April, just above the 3.3% gain in March and matching the market estimate. Monthly, the indicator remained at 0.2%, just below the market estimate of 0.3%.
The money markets responded by virtually ruling out a rate hike in June, after the Reserve Bank of Australia raised rates earlier this month by 25 basis points to 4.35%. Still, inflation remains a concern and the markets expect at least one more rate hike in 2026.
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New Zealand Dollar, Stock Market Post Gains
The New Zealand dollar has gained ground in the aftermath of RBNZ’s hawkish rate decision. The NZD/USD currency pair is up 0.61% on the day, trading at 0.5873.
The NZX 50, New Zealand’s main stock index, climbed 158 points (1.2%) to close at 13,228 on Wednesday, hitting nearly a three-week high.
Australian Dollar Dips, Stock Market Higher
The AUD/USD currency pair continues to range trade this week. In Wednesday’s European session, the Australian dollar is up 0.30%, trading at 0.7146.
The benchmark Australian index, the S&P/ASX 200, posted gains on Wednesday, rising 60 points (0.69%) and closed the day at 8,717.
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