New Zealand Central Bank Holds Rates But Signals Hikes, Kiwi Dollar Jumps

WELLINGTON: New Zealand’s central bank held interest rates steady on Wednesday but signaled that hikes are likely to come sooner and be more aggressive than previously expected, citing the impact of a global energy shock and rising inflation. The hawkish tone came after a knife-edge vote and sent the New Zealand dollar rallying.

The Reserve Bank of New Zealand (RBNZ) kept its official cash rate (OCR) on hold at 2.25%. The decision was reached after a 3-3 split among the six-member policy board, with Governor Anna Breman casting the deciding vote to maintain the current rate. In its policy statement, the RBNZ warned, “On balance, the OCR will most likely need to increase sooner and by more than envisaged in the February Monetary Policy Statement.”

Following the announcement, the kiwi dollar jumped 0.6% to $0.5869. Markets moved quickly to price in a higher probability of a rate hike in July, with odds increasing to around 75%, and now see rates reaching 3.0% by the end of the year. The RBNZ’s own revised forecast projects the cash rate will hit 2.84% by December.

The central bank’s calculus has shifted due to persistent inflation, which has run at 3.1% for two consecutive quarters, sitting above the bank’s 1% to 3% target range. The RBNZ now expects inflation to climb to 4.3% in the September quarter, driven largely by war-related disruptions to global oil supplies. The conflict in the Middle East has effectively shut the Strait of Hormuz, a critical channel for 20% of the world’s oil and gas shipments.

The RBNZ’s stance aligns with a global trend of hawkish central banks, including the U.S. Federal Reserve and the Reserve Bank of Australia. The policy shift comes as New Zealand’s economy emerges from a recession with anaemic growth, which is being further squeezed by the Middle East turmoil and a tight fiscal stance ahead of the government’s annual budget announcement on Thursday.