Unexpected rate moves impact markets
Monetary policy surprises – central bank decisions that deviate from market expectations – can have a significant impact on financial markets, particularly interest rates and the New Zealand dollar exchange rate.
A new RBNZ analytical note examined these unexpected monetary policy moves and their effects on financial instruments, providing insight into the connection between central bank communication and market reactions.
Monetary policy surprises: Rare but impactful
The report defined a “monetary policy surprise” as any OCR announcement where the market’s forecast was off by more than five basis points.
These surprises are relatively infrequent, with fewer than one in five OCR announcements since 2006 fitting this definition. Despite their rarity, these surprises can lead to notable shifts in the financial landscape.
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Impact on New Zealand dollar and interest rates
According to the analytical note, a monetary policy surprise of +10 basis points typically leads to a 0.5% increase in the New Zealand dollar’s trade weighted index (TWI) within an hour of the announcement. This aligns with previous research on how unexpected rate changes affect the currency.
The RBNZ report also assessed the impact of these surprises on domestic interest rate swaps and their spread compared to equivalent offshore rates.
Statements vs. reviews: Stronger market reactions
The RBNZ report also found that surprises stemming from monetary policy statements tend to have a more pronounced and lasting impact on financial markets than those from monetary policy reviews.
This could be attributed to the broader range of information typically included in monetary policy statements, leading to a stronger response from market participants.
Understanding how markets respond to unexpected policy changes is critical for evaluating the transmission of monetary policy through financial markets, said RBNZ, which recently opened consultations on the next set of standards under the Deposit Takers Act 2023 (DTA) and an Issues Paper on the crisis management framework.
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