NZ central bank holds official cash rate at 2.75%, flags rate hikes likely

By Lucy Craymer

AUCKLAND, Oct 28 (Reuters) - New Zealand's central bank held its benchmark official cash rate at 2.75% on Wednesday by a narrow vote, but said the committee agreed that tighter monetary policy is likely to be required, depending on the economic outlook.

The decision was unexpected, with 22 of 27 economists polled by Reuters forecasting the Reserve Bank of New Zealand would raise the cash rate by 25 basis points NZINTR=ECI.

The New Zealand dollar dropped sharply to $0.5590 from $0.5676 and 2-year swaps fell from a high of 4.1109% to a low of 3.9497% following the decision.

The central bank has hiked the cash rate at its previous two meetings due to concerns inflation was sitting outside the central bank's target range of 1% to 3%. However, the rate remains well below its peak of 5.5% in August 2024, after the central bank embarked on a rapid easing cycle as the economy struggled and inflation eased.

The decision to hold was tight, with four members of the committee, including Governor Anna Breman, voting to keep the cash rate steady, while three members wanted to hike the rate.

"All Committee members agreed on the overall outlook for inflation. However, members differed in how much weight they placed on various risks and the timing of the monetary policy response," the RBNZ said in the accompanying Monetary Policy Review statement.

The central bank's decision comes just 10 days before a close-fought general election in which the outlook for the economy and inflation remains a key issue for voters.

"The Committee is focused on sustainably returning inflation to the 2% target mid-point over the medium term, while avoiding unnecessary instability in output, employment, interest rates and the exchange rate," the RBNZ said in the minutes of the meeting.

The RBNZ did not release a full set of economic forecasts but said global events are adding to near-term inflation pressures in New Zealand and annual inflation is expected to increase to 4.4% in the December quarter.

New Zealand's economy picked up in the second half of 2025, but the recovery stalled in the second quarter as fuel prices soared due to the US-Israeli war with Iran. The Reserve Bank said that economic conditions remain uneven.