INSTANT VIEW-RBNZ surprises the market by holding rates

Oct 28 (Reuters) - New Zealand's central bank unexpectedly left its official cash rate at 2.75% on Wednesday, sending the New Zealand dollar sharply lower as investors dialled back the outlook for hikes.

The decision was by a narrow vote and came with agreement that tighter policy is necessary. But according to Westpac, it's the first time, outside the pandemic, that the central bank held rates while markets had priced a more than 70% chance of a hike.

The two-year swap rate dived 13 basis points, which if sustained would be its steepest fall in more than a year. The kiwi fell around 1.5% to $0.5598. AUD/

Here are market participants' reactions:

QUOTES

PRASHANT NEWNAHA, SENIOR RATES STRATEGIST, TD SECURITIES, SINGAPORE:

"The RBNZ surprised the market holding the cash rate at 2.75% in a decision that went down to the wire, 4-3.

"The Bank of Canada is widely expected to hike later today but the RBNZ decision suggests this in no way is a sure bet. TD expects the BoC to hold, a non-consensus view, but we do expect the bank to hike in December. We don't expect the Fed or the BOJ to surprise markets with a hike this week."

HIROFUMI SUZUKI, CHIEF FX STRATEGIST, SMBC, TOKYO:

"It was a surprise. The recent rise in long-term yields and decline in equity prices had already tightened financial conditions, which likely tipped what appears to have been a close call in favour of holding rates steady.

"That said, with the RBA and other major central banks maintaining a hawkish stance, the RBNZ has little choice but to retain a hawkish bias as well.

"I expect the RBNZ to continue raising rates cautiously, but the kiwi is likely to face greater downward pressure."

IMRE SPEIZER, MARKET STRATEGIST, WESTPAC, AUCKLAND:

"Massive! Shocker!

"It looks like there's caution here on interpreting what the medium-term sticky inflation outlook really is. They want to see more evidence. They're still pointing to more tightening and upside inflation risks.

"It's not out of step with the big central banks."

TINA TENG, MARKET STRATEGIST, MOOMOO ANZ, AUCKLAND:

"The central bank faces a dilemma in balancing economic growth and energy-price-fuelled inflation. Global risks, including surging oil prices and a slowdown in economic growth in China, are likely to continue to challenge domestic business profitability and exports.

"A weaker kiwi dollar tends to benefit exports but raises costs for imports, putting upside pressure on domestic inflation."

JOSEPH CAPURSO, HEAD OF FX, COMMONWEALTH BANK OF AUSTRALIA, SYDNEY:

"Well, I guess they've got a relatively new governor, and she's going to do things her way. I point that out because she voted to keep the cash rate steady; the chief economist voted to increase it. So there's a bit of a split at the top there.

"We think there's probably still a good chance they'll hike again, but the market is rethinking just how much more hikes are going to be delivered.

"We think that when it comes to, say, Bank of England, ECB, markets are pricing too much hikes. We think market pricing for the Fed is about right (but) there may well be too much interest rate hikes priced in."

THOMAS MATHEWS, HEAD OF MARKETS FOR ASIA PACIFIC, CAPITAL ECONOMICS, WELLINGTON:

"It looks like the RBNZ has delayed tightening rather than cancelled it outright and they'll probably resume before long.

"That said, given the economic backdrop it always seemed as though market pricing was a bit too aggressive: I wouldn't be surprised if we get more dovish 'surprises' over time and more kiwi weakness."

SUE ANN LEE, ECONOMIST, UOB, SINGAPORE:

"The RBNZ's decision to hold was indeed a surprise. A reminder that central banks are not reacting mechanically to inflation surprises. Markets had priced a hike, but the MPC appears to have judged that the growth outlook and uneven recovery warrant more patience. The 4-3 split and guidance that further tightening is likely suggest this is a delay rather than a cancellation of hikes."