The United States Federal Reserve yesterday hogged global headlines by making it clear a lift in its official lending rate was possible in December.
The Reserve Bank of New Zealand kept its official cash rate unchanged at 2.75%. But it was a secondary player as the Fed caused the most reaction around the world.
It is possible the Fed will lift its cash rate in December and the Reserve Bank will cut the rate here.
Both options have their supporters and sceptics.
The New Zealand and Australian dollars fell in value against the US dollar which rose on the expectation of the first Fed rate rise in eight years.
The lending rate in the US is 0.5%.
After a two-day meeting, policy makers at the US central bank expressed more faith in the strength of the economy than expected, brushing over recent weak spots and focusing on what they called solid consumer spending and business investment.
The Federal Open Market Committee also dropped its warnings from September of the global downturn affecting the US, even as worries mounted over China's slowdown and falling commodity prices.
Craigs Investment Partners broker Chris Timms said the US stock markets ended higher after the Fed left its monetary policy unchanged but signalled a rate increase was on the table for its next meeting in December.
''Investors had expected the Fed to remain pat on rates, but the overt reference to December came as a surprise. The central bank also downplayed recent global financial market turmoil and said the US labour market is still healing, despite a slower pace of job growth.''
Investors quickly shifted their expectations of a December hike, with rates futures contracts increasing the change of a move this year to 43% from 34% before the statement, he said.
As the dollar rose, so did yields for US government debt which soared in anticipation of tighter policies.
The Fed had struggled to convince sceptical investors a rate hike was imminent.
Before the meeting, financial markets saw virtually no indication it would raise rates this week, Mr Timms said.
Reserve Bank governor Graeme Wheeler said global economic growth was below average and global inflation was low, despite highly stimulatory monetary policy.
Financial market volatility had eased in recent weeks but concerns remained about the prospects for slower growth in China and East Asia especially.
Financial markets were also uncertain about the timing and effects of monetary policy tightening in the US and possible easings elsewhere, he said.
''To ensure future average consumer price index inflation settles near the middle of the target range, some further reduction in the OCR seems likely. This will continue to depend on the emerging flow of economic data. It is appropriate at present to watch and wait.''
BNZ senior economist Craig Ebert said there would be many people who would grumble at the lack of further action from the Reserve Bank.
While most analysts had, at the 11th hour, switched their call to a no-go for yesterday's review, they also tended to be of the opinion the Reserve Bank would be making a misjudgement in doing so.
The bank should cut, but probably would not, was the refrain, he said.
The BNZ would keep with its 2.5% base call for the OCR, which it would migrate to the December 10 Monetary Policy Statement.
''But we wouldn't want to hard sell it from what the Reserve Bank has outlined,'' Mr Ebert said.
''A lot will depend on the data between now and the December Monetary Policy Statement.''
Westpac chief economist Dominick Stephens said the Reserve Bank review read like a list of factors the central bank would be watching between now and December.
They included:
• Uncertainty about the United States Federal Reserve's actions;
• It was too early to tell whether the recent rise in dairy prices would be sustained. If it was, the OCR was less likely to be cut;
• High Auckland house prices were mentioned, although the Reserve Bank seemed less uncertain on housing;
• The Reserve Bank explicitly linked the exchange-rate and interest-rate decisions, saying if the exchange rate sustained its recent rise, a lower interest-rate path than otherwise would be required.
''The last of these particularly caught our eye and prevented us from interpreting the statement as unambiguously hawkish,'' Mr Stephens said.
Westpac's views on developments between now and December were dairy prices would stay high and so would the exchange rate.
The Auckland housing market would show few signs of slowing, while markets in other parts of New Zealand continued to improve.
The Fed was expected to lift rates in December, although the decision would be made a week after the Reserve Bank's decision.
''If we are right about the way conditions are going to develop, the Reserve Bank will most likely cut the OCR in December because of the high exchange rate.''
Trends summarised
• Reserve Bank keeps its official cash rate at 2.75% but indicates it may cut in December.
• The US Federal Reserve keeps its official lending rate unchanged but indicates it may lift it in December.
• The New Zealand and Australian dollars fall against their US counterpart.
• Dairy prices and the Auckland housing market concern the Reserve Bank.
