Reserve Bank of New Zealand Rate Decision Points to 3%

The Reserve Bank of New Zealand is preparing to raise its policy rate by 25 basis points as rising fuel prices and a weakening local currency fuel consumer price inflation (CPI) risks. At Wednesday's monetary policy meeting, the benchmark rate could climb to 3%. Scheduled just 10 days before the country's November 7 general election, this critical meeting will bring the 3rd consecutive rate hike. Financial markets have priced in this tightening move with an estimated 90% probability.

At the bank, which raised its policy rate to 2.75% in September, Governor Anna Breman had signaled that the tightening cycle could be paused. However, tensions in the Middle East reigniting global crude oil prices completely changed monetary policy calculations. Rising fuel costs directly feed into the household consumption basket. Annual inflation in the country slowed from 4.1% to 3.7% in the 3rd quarter, falling below the bank's 3.9% forecast. In contrast, market expectations indicate that the inflation rate could jump to 4.7% in the 4th quarter. With inflation running above the bank's 1% to 3% target band, a rate hike becomes necessary.

Will the Reserve Bank of New Zealand raise interest rates?

Market pricing keeps the probability of a 25 basis point hike at 90%, indicating that the decision is largely certain. If this step is taken, the policy rate will directly reach the 3% threshold. However, rather than the rate decision itself, the guidance provided in the policy statement will determine the primary volatility in foreign exchange markets. While maintaining a hawkish stance would support the local currency, a wait-and-see bias could dampen rate hike expectations. A surprise move by the institution to leave rates unchanged could catch markets off guard and trigger sudden selling pressure. Investors are also closely monitoring the Reserve Bank of Australia interest rate meeting on November 3.

How will the New Zealand dollar be affected by the interest rate decision?

Following the decision, the key determinant of the currency's trajectory will be forward guidance on the interest rate path. According to ASB projections, the policy rate will peak at 3.5% in February, and this hike expectation will continue to underpin the New Zealand dollar. In addition, ongoing tightening steps will support short-term bond yields upward. Westpac economists, meanwhile, project that the tightening cycle will persist and the policy rate will reach 4% by September 2027.

This content is for information purposes only and does not constitute investment advice.