New Zealand's annual CPI fell to 3.7% from 4.1% in Q2. Quarterly inflation was 0.7%, below the 0.8% consensus and the RBNZ's September forecast. The slowdown stems from an inflation mix that differs markedly from most other advanced economies.

The annual pace of tradable inflation dropped to 4.3% from the double-digit levels seen mid-year, and quarterly tradable inflation was just 0.2% — the slowdown driven by lower fuel prices. Non-tradable inflation, by contrast, remained at 3.3% year-on-year, while the quarterly rise of 1.0% was weaker than the RBNZ's expected 1.3%.

Having weighed the inflation data, the RBNZ likely concluded there is no overheating of domestic demand. This morning the bank surprised markets by voting 4–3 to hold the policy rate at 2.75%, while the market had priced a roughly 80% chance of a rate hike.

Those in favour of pausing pointed to weak domestic demand, noting that the two prior rate hikes had already had some effect and time was now needed to evaluate it, especially given stable medium-term inflation expectations and muted wage growth. Proponents of a rate increase argued that core inflation measures were already at the top of the target range and price pressures were broadening: over 85% of the CPI basket had risen over the year. They warned that delay could allow inflation expectations to become entrenched.

RBNZ Governor Berman said at the press conference she expects further hikes at future meetings and added that it may be necessary to move into restrictive territory. That statement largely neutralised the "dovish" effect of the decision itself. The RBNZ also raised its inflation forecast for Q4 to 4.4% — a sharp uptick from 3.7%, reflecting not only fuel but also a roughly 3% weakening of the kiwi since September.

The October 28 decision does not cancel the tightening cycle; it merely postpones it. The market, which initially read the pause as a signal that the cycle had ended, quickly adjusted expectations after Berman's comments. The December meeting is now the most likely window for a third hike. If the quarterly inflation data for December — published in January but already being priced in — confirm that price growth is not limited to fuel and is spreading to services and non-tradable components, the RBNZ will have a mandate to act.

The main rationale for a December hike is the logic behind October's decision. If the committee was prepared to raise the rate now based on core inflation risks and currency weakness, November and December data will hardly change that picture materially toward easing. If anything, they could strengthen the case: if fuel remains expensive and the kiwi stays weak, inflationary pressure in Q4 could exceed 4.4% and make the October pause increasingly hard to justify.

Net short positions in NZD increased over the reporting week by 0.63 billion to -3.27 billion; the implied price remains below the long-run average, and there are no conditions yet for a return to a growth trajectory.

The kiwi fell as expected after the RBNZ meeting; the odds of a corrective rally have diminished, and the local high of 0.5705 is unlikely to be revisited. We expect attempts to break the 0.5560 low, after which the next target would be the two-year trough at 0.5481.