AUCKLAND (Oct 28): New Zealand's central bank unexpectedly 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 New Zealand dollar slumped 1.2% in its biggest one-day drop since March, while two-year swaps slid by 10 basis points, as the decision wrong-footed investors and countered the expectations of most economists in a Reuters poll.

Markets are now pricing in a 75% chance of a hike in December.

The decision to hold was tight, with four members of the Reserve Bank of New Zealand's (RBNZ) monetary policy 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.

Commenting on the policy rate path, Breman said at its September meeting the committee expected to see further official cash rate increases over coming meetings. On Wednesday, "the committee discussed that they may even be higher than we said at the September meeting," she said at a press conference.

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 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.

Westpac said the decision marked the first time, outside the Covid pandemic, that the central bank held rates while markets had priced a more than 70% chance of a hike.

"We are frankly flabbergasted by the RBNZ’s decision to leave interest rates on hold," said Stephen Toplis, head of research at Bank of New Zealand. He said the decision to move "diametrically against" markets had added to inflationary pressure instantaneously by encouraging an already soft New Zealand dollar to fall further.

He said the biggest problem facing New Zealanders is the cost of living — and the election is almost singularly focused on it — and a weaker New Zealand dollar is only going to add further pressure by making imports more expensive.

Breman said the committee was concerned that if the New Zealand dollar continues to be weak, it could have an impact on inflation, but she added members did recognise that short-term volatility doesn't tend to have a large impact.

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.

Committee members who voted to hold the cash rate wanted to allow the committee further time to assess the effects of the two recent cash rate increases and economic developments, minutes from the meeting said.

Those who supported an increase argued that acting now would guard against sustained inflation pressures and potentially reduce the risk of needing to do more later.

Breman said the committee would be watching partial consumers price index indicators to see how higher fuel prices are feeding into other pricing and labour data, along with how the global economy is evolving.

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.

Sunny Nguyen, an economist at Moody’s Analytics, said holding the cash rate raised the risk the bank would fall behind.

"Holding now raises the bar for December: if fuel prices stay high and inflation expectations drift higher, the Bank may need to move then, and possibly by more than it would have if it had acted today," Nguyen said.

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