The Reserve Bank has held the official cash rate at 2.75% in a split decision that defied market expectation, sending the dollar falling and prompting economists to warn inflation could prove harder to shift, Henry Oliver writes in today\u2019s excerpt from The Bulletin.<\/p>\n
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The Reserve Bank\u2019s monetary policy committee voted 4-3 to hold the official cash rate at 2.75%, RNZ reported yesterday<\/a>, with governor Anna Breman siding with external members Prasanna Gai and Carl Hansen and newly appointed senior manager of economics Rebecca Williams. Chief economist Paul Conway, assistant governor Karen Silk and external member Hayley Gourley voted to hike.<\/p>\n The bank said annual inflation is expected to rise to 4.4% in the December quarter, largely reflecting fuel futures prices, and that tighter policy is \u201clikely to be required but remains conditional on the economic outlook.\u201d The New Zealand dollar fell about 1.3% to 56.1 US cents, RNZ reports.<\/p>\n \u2018Frankly flabbergasted\u2019<\/p>\n Economists were generally critical of the decision. BNZ head of research Stephen Toplis told the Herald\u2019s Liam Dann<\/a> he was \u201cfrankly flabbergasted,\u201d noting it is \u201crare that they move diametrically against\u201d market pricing and consensus \u2013 and that the bank had \u201cadded to inflationary pressure instantaneously by encouraging an already soft New Zealand Dollar to fall further.\u201d<\/p>\n ASB senior economist Mark Smith described a \u201cdovish hold,\u201d warning risks to the OCR over 2027 were \u201ctilted further to the upside,\u201d and picked consecutive 25 basis point hikes in December, February and March to a 3.5% peak. ANZ chief economist Sharon Zollner said a hike on Wednesday \u201cwould have been the most prudent course\u201d and expected the same three-step path to 3.5%. Infometrics\u2019 Brad Olsen said something had \u201cspooked\u201d the committee: \u201cThere seems limited direct evidence of an abrupt global downturn in the next six weeks!\u201d<\/p>\n Capital Economics said the hikes were \u201cdelayed, not cancelled.\u201d Financial markets now price about a 75% chance of a December rise, according to RNZ.<\/p>\n Breman\u2019s defence<\/p>\n Breman pushed back on criticism of holding with inflation at 3.7%, outside the 1-3% target band. \u201cWhen we look very deeply at this number, 3.7% is far too high, but it was actually lower than we expected,\u201d she said, according to the Herald. Higher fuel prices had not fed into other categories as feared, inflation expectations remained \u201cwell anchored,” and wage growth was below what returning to target required. She said further rises were still likely, and did not rule out more than the roughly 3.25% peak projected in September. She also rejected any suggestion the election timing played a part.<\/p>\n Borrowers and savers<\/p>\n Westpac\u2019s Kelly Eckhold told RNZ\u2019s Susan Edmunds<\/a> the one-year swap rate had already fallen 20 basis points, implying downward pressure on mortgage rates if sustained \u2013 and said holding was the right call. Infometrics\u2019 Gareth Kiernan expected easing in six-month and one-year rates; Cotality’s Kelvin Davidson said fixed rates were unlikely to spike because a hike had already been priced in, but called the reprieve \u201ctemporary.\u201d Simplicity\u2019s Shamubeel Eaqub cautioned borrowers to \u201ccarefully consider their ability to absorb higher mortgage rates in the future.\u201d<\/p>\n For savers, the Herald\u2019s Jen\u00e9e Tibshraeny<\/a> reports the hold will keep deposit rate rises at bay. With $275bn deposited in New Zealand banks and credit growth subdued, banks have had little reason to compete for funding. Wholesale rates fell sharply at the short end, which Wedge founder Dave McLeish said would hold back shorter-term deposit rates. Average new three-year deposits were 4.49% in September, 80 basis points above November; six-month and one-year were 3.59% and 4.02%.<\/p>\n Retailers and the margin argument<\/p>\n Retail NZ chief executive Carolyn Young told RNZ\u2019s Felix Walton<\/a> the lower dollar would squeeze margins on imported goods, though a stable OCR could lift consumer confidence into the holiday season.<\/p>\n