By Lucy Craymer
WELLINGTON (Reuters) -New Zealand's central bank held rates steady on Wednesday as policymakers were more confident that past hikes were working to bring down inflation as desired, sending the local dollar skidding as markets pared bets of any further tightening.
The Reserve Bank of New Zealand (RBNZ) kept the cash rate at a 15-year high at 5.5% and said policy needs to remain restrictive to bring inflation to heel, but stopped short of suggesting further increases were on the cards.
"Interest rates are constraining economic activity and reducing inflationary pressure as required," the central bank said in a statement.
The decision was in line with all 27 economists polled by Reuters, but the less hawkish-than-expected policy stance sent the New Zealand dollar sliding 0.5% to a three-week low of $0.5878.
Bank bill futures recouped all their early losses to turn higher as the market pared back the chance of a hike in November to 45% from 55% earlier.
"We see this statement as more dovish than our expectations," said Westpac NZ chief economist Kelly Eckhold.
"We anticipated the RBNZ would craft a statement that broadly endorsed current market pricing for around a 50/50 chance of a 25 bp rate rise in November. This statement suggests that view was too hawkish."
RESTRICTIVE POLICY
The RBNZ said the monetary committee agreed that interest rates will need to remain at a restrictive level for the foreseeable future to ensure consumer price inflation returns to its 1% to 3% target range.
Yet, while the bank cautioned of a near-term risk that activity and inflation do not slow as much as needed, policymakers noted that the economic outlook remains subdued and that spending growth was expected to decline further.
Global central banks, led by the U.S. Federal Reserve, have started to slow their sweeping tightening campaign as inflation has come off alarmingly high levels. All the same, in many developed economies, including New Zealand, policymakers say inflation is still at levels that requires a further period of restrictive monetary conditions.
The past RBNZ rate hikes have sharply slowed New Zealand's economy but recent data showed it was tracking above central bank expectations at 0.9% quarterly growth.
The central bank releases a comprehensive update of economic indicators and the forecast official cash rate track when it publishes its quarterly Monetary Policy Statement (MPS), which is due on Nov. 29.
A front-runner in withdrawing pandemic-era stimulus among its peers, the RBNZ has lifted rates by 525 basis points in its fight against inflation since October 2021 in the most aggressive tightening since the official cash rate was introduced in 1999.
High interest rates and the rising cost of living have become hot-button issues at the election on Oct. 14 with opposition parties promising to cut spending to help the central bank bring inflation under control.
New Zealand's annual inflation has come off in recent months and is currently running at 6.0%, just below a three-decade high of 7.3% in June 2022 with expectations that it will return to its target band within the next two years.
"The Bank appears content to wait for restrictive policy settings to fully feed through to the real economy," analysts at Capital Economics in a note.
"All told, we’re sticking with our view that barring any major upside surprise in the incoming data, the RBNZ’s tightening cycle is over"