New Zealand dollar nosedives after RBNZ stuns market

SYDNEY: The New Zealand dollar tumbled and bonds surged on Wednesday after the country’s central bank stunned markets by skipping a chance to raise interest rates, though it signalled further tightening would come at some point.

The dovish outcome contrasted with comments from the Reserve Bank of Australia that underlined the risks of hot inflation data, which led investors to sharply narrow the odds on a hike at its board meeting next week.

As a result, the Aussie dollar jumped 2% against the kiwi at one stage to hit the highest point since early 2013 at NZ$1.2602, while the kiwi dove 1.2% versus the greenback to $0.5607.

The Aussie edged up only slightly against the greenback to $0.7034.

Markets had been 100% priced for a quarter-point hike from the Reserve Bank of New Zealand, so its decision to hold the official cash rate at 2.75% triggered wild swings with short-term swap rates sliding 10 basis points.

The decision was a close call as the committee voted 4-3 for a hold and Governor Anna Breman repeatedly emphasised that further increases would be needed, though the timing was in doubt.

“It seems clear enough that higher interest rates are in the future if the data evolves as the committee expects,” said Kelly Eckhold, chief NZ economist at Westpac.

“We expect a 25-bp increase in December to 3%, but don’t think it is a done deal as the data will inform the next move.”

Investors seemed to hold the same view, pricing in a 75% chance of a hike in December.

They also expected rates to reach 3.75% by the middle of next year.

Across the Tasman, Australian consumer price figures proved as frothy as many feared with core inflation climbing 1% in the third quarter, taking the annual pace up to a two-year top of 3.7%.

Speaking to lawmakers, RBA Governor Michele Bullock said inflation was “far too high,” leaving analysts with the clear impression she was for tightening next week.

“We now expect the RBA to hike in November to 4.85%,” said Belinda Allen, head of Australian economics at CBA.

“There remains a risk of further rate hikes due to structural forces, though this will wane if there are clearer signs of a slowing economy from here as we expect.”

Markets shifted to imply an 88% chance of a quarter-point rise when the RBA meets on November 3, up from 60% before the data was released. They also imply a 50-50 probability of one further move to 5.10%.