RBNZ Holds Cash Rate at 2.75% in Surprise 4-3 Vote

The Reserve Bank of New Zealand kept its official cash rate unchanged at 2.75% at its October 2026 meeting, defying market expectations for a 25bp hike. The decision was split 4-3, as policymakers prioritised returning inflation to the 2% midpoint of the target range while avoiding unnecessary volatility in output, employment, interest rates and the exchange rate. Members agreed that further tightening would likely be needed, with timing depending on the economic outlook, while highlighting risks to inflation. Wage growth remained subdued and medium-term inflation expectations stable, with administered price inflation lower than expected in Q3. The board also flagged uncertainty over near-term inflation due to volatile oil and fuel prices. Higher global yields may reflect rising inflation expectations, war-related destruction, and demand for capital to support AI investment, but could also accelerate a global downturn and trigger a rapid decline in the neutral interest rate.

Reserve Bank of New Zealand Chief Economist Paul Conway said Thursday that the central bank’s late-October rate decision remains open despite mounting price pressures. Speaking at IMF and World Bank meetings in Bangkok, he stressed that policymakers want flexibility to either hold the Official Cash Rate or raise it by 25bps. While a hike is still seen as the most likely outcome, its timing is uncertain. Conway noted oil price gains and a weaker New Zealand dollar have added near-term inflation pressure, complicating the outlook. Still, the board expects inflation to ease back into its 1–3% target next year. With risks skewed to higher near-term inflation, officials are keeping both options open, with the scale and timing of any tightening dependent on incoming data.

The Reserve Bank of New Zealand raised its cash rate by 25 bps to 2.75%, delivering a second straight hike after an increase in July and in line with expectations. The decision reflects the need to gradually remove monetary stimulus and bring inflation back to the 2% target midpoint while supporting growth and employment. Annual inflation rose to 4.1% in Q2 2026, largely due to higher fuel prices stemming from the Middle East conflict. However, core inflation, wage growth and inflation expectations remain consistent with inflation returning to the 1-3% target band by mid-2027. The economy has likely resumed its recovery after lacklustre growth in Q2, supported by resilient external demand, export prices and investment in export-oriented sectors. Still, weak income growth, job insecurity and flat house prices weigh on household spending and residential investment. The Committee expects the recovery to strengthen and broaden but remains alert to risks of more persistent inflation.