RBNZ Split Vote Lifts NZD as Swedish PPI Hits 4.7%

The Reserve Bank of New Zealand kept its cash rate at 2.25% in a 4-3 split decision, with Governor Breman casting the deciding vote to hold. The accompanying statement signalled that rates will need to rise more and sooner than the February projections implied. The NZD strengthened immediately, and front-end yields rose as markets repriced the rate path. This central bank catalyst sets the tone for the Asia-Pacific session, while Swedish PPI data adds pipeline inflation pressure in Europe and US-Iran tensions cap risk appetite.

RBNZ Split Decision Lifts NZD and Front-End Yields

The RBNZ’s Monetary Policy Statement contained a clear hawkish shift. Three members voted for an immediate hike, a rare display of internal divergence. Governor Breman’s hold vote prevented a move today, the statement made it clear that future meetings carry a strong tightening bias. Markets immediately priced in a higher terminal rate.

Governor Breman’s Casting Vote

The split vote is unusual for the RBNZ and signals that the tightening bias is broadening. The NZD/USD pair moved above 1.16 in the hours following the release, a level that had held as resistance in recent sessions. For NZD traders, the carry differential has improved relative to AUD and USD, reinforcing the bullish case as long as the RBNZ sticks to this trajectory.

Rate Path Steepens

Front-end New Zealand government bond yields rose, with the 2-year yield reacting most directly to the revised rate path. The implied probability of a hike at the next meeting jumped above 60%, based on overnight index swap pricing. The RBNZ’s revised forecasts imply at least two more rate increases by the end of the year. This steepening of the rate path supports the NZD in the near term, the broader risk backdrop from US-Iran tensions may cap gains.

US-Iran Tensions Cap Risk-On Despite Equity Rally

While the RBNZ dominated the Asia-Pacific session, global markets continue to digest the fallout from US-Iran military strikes. Iran condemned the attacks on its vessels and missile launch sites, calling them a ceasefire violation. The Revolutionary Guard reserved the right to retaliate. Back-channel talks are reportedly still active, and Iran began restoring public internet access after a prolonged blackout. These mixed signals are keeping Brent oil in check after it peaked at $100.5/bbl; it has since pulled back to $98/bbl.

The oil price moderation helped US Treasury yields trade lower overnight. The 2-year UST sits at 4.015%, the 10-year at 4.47%. Lower yields typically support risk assets, and equities took the cue.

Small Caps Outperform

Equity markets broadly rose, with the S&P 500 up 0.6%. The standout was the Russell 2000 index of small caps, jumping 1.8%. This is a notable rotation given the perception of a narrow tech rally – the Russell is up 16% year-to-date against the S&P’s 10%. Earnings breadth is supporting the move: the “S&P 493” (excluding the top seven tech names) delivered the strongest earnings growth since 2021. Valuations for small caps remain attractive relative to large-cap tech, and macro conditions point to further earnings acceleration.