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A warning on oil from the RBNZ Governor has pushed markets ahead of the central bank's own rate track.
The Pound to New Zealand Dollar exchange rate fell on Tuesday after the Governor of the Reserve Bank of New Zealand (RBNZ) warned higher oil prices will lift near-term inflation above the central bank's forecasts.
"If higher oil prices persist, they are expected to result in somewhat higher near-term inflation than we assumed in the September Statement," says Anna Breman, Governor of the RBNZ, in notes from a speech in Dunedin.
Money markets now imply around a 75% chance of a hike to 3.00% at the 28 October meeting, up from roughly 57% before the remarks.
GBP/NZD fell 0.7% to 2.3284, moving towards the 2.30 to 2.31 support band identified in Monday's week ahead forecast.
RBNZ Track Lags Market Pricing
The RBNZ raised the Official Cash Rate (OCR) by 25 basis points to 2.75% on 2 September and said its new projections put the OCR at 3.0% by March 2027 and 3.2% by the end of that year, short of the 3.50% markets had priced for mid-2027.
GBP/NZD rose 1.25% that day as the Kiwi fell on a rate rise, with the RBNZ's own track capping the currency's upside.
The RBNZ also said a stronger exchange rate had helped tighten domestic financial conditions, limiting the need for further hikes. That support has since reversed, with the Kiwi among the weakest G10 currencies over the past month.
Daniella Arcadipane, Senior Currency Specialist at Indigo
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Markets now price in an October hike, even if Breman did not commit to a move.
"As always, we will assess incoming data and global developments ahead of our next decision in October and remain focused on the outlook for inflation over the medium term," says Breman.
She noted significant risks to the outlook remain, while expecting the recovery to strengthen and broaden, "reflecting a resilient export sector and gradual increase in household spending."
The RBNZ is Expected to Deliver
ASB expects two further hikes this year and fellow local lender ANZ changed its OCR call on Monday and now sees the OCR at 3.50% by March.
"While we still expect another hike in October, followed by a pause in December as the RBNZ assesses the impact of tightening up to that point, we now expect two further 25bp hikes in February and March," says ANZ.
ING judged after the September decision that market pricing of 95 basis points of tightening by June 2027 looked "way too hawkish."
The Carry Gap
ANZ cautions that higher-yielding currencies continue to outperform the Kiwi on carry.
"Even with markets expecting about five more OCR hikes, that still would not take the OCR anywhere near the US federal funds rate or the RBA cash rate, both of which are expected to keep rising," says ANZ.
Breman's warning also rests on oil staying high: Brent crude trades around $102 a barrel after briefly falling below $100 on Monday on hopes of US-Iran diplomacy at the United Nations General Assembly.
A fall in oil prices could therefore prompt the RBNZ to sit back and trigger a 'dovish' market repricing that ultimately weighs on the NZD and help GBP/NZD to the year's highs.
Third-quarter inflation data on 21 October is the last major input before the RBNZ's decision, with the central bank forecasting headline inflation to ease to 3.9% from 4.1%. A print above that would validate October pricing and push GBP/NZD to the lower end of the 2.30 to 2.31 band.
Daniella Arcadipane, Senior Currency Specialist at Indigo
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