In something of a surprise move, the Reserve Bank of New Zealand (RBNZ) increased the policy rate by “only” 25 basis points (bp) to 5.5 percent. Moreover, the RBNZ Monetary Policy Committee channelled their inner Jim Morrison by suggesting a “break on through to the other side” with the next policy shift expected to be an easing, albeit that looks to be at least a year away.

Financial markets were wrong-footed by the move thinking that after what looked to be an expansionary budget, the RBNZ would continue the hawkish tack that it displayed at the last meeting in April when it surprised with a hawkish 50 bp increase. However, at yesterday’s meeting the RBNZ Monetary Policy Committee (MPC) members even discussed the option of keeping rates unchanged, but ended up voting in favour of one last increase by a 5-2 margin.

The NZD fell around one percent in the wake of the decision, while bond yields fell sharply – 2-year yields fell circa 30 bps in the wake of the announcement, while 10-year yields fell circa 15 bps.

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