What to Expect from the RBNZ, BoC and Fed

 Wednesday, October 28, will bring three important monetary policy decisions, with the Reserve Bank of New Zealand (RBNZ), Bank of Canada (BoC) and Federal Reserve (Fed) all confronting renewed inflation concerns.

Higher energy costs are complicating the outlook, but the economic and political circumstances facing each central bank differ. While New Zealand may be preparing to tighten policy ahead of a closely contested election, Canada is weighing the risk of allowing inflation to spread, and the Fed is expected to hold rates steady before potentially resuming its tightening cycle in December.

For currency traders, the decisions themselves will matter, but the accompanying guidance on inflation, growth and future interest rates could prove more significant. Traders should expect higher volatility in the Forex market, especially the NZD/USD, the USD/CAD, and the Dollar Index.

RBNZ: Will Inflation Force a Pre-Election Rate Hike?

With inflation running above target and a November 7 general election fast approaching, the Reserve Bank of New Zealand faces a challenging decision at Wednesday’s rate review.

New Zealand's annual consumer price inflation slowed to 3.7% in the third quarter, from the previous quarter's pace, according to Statistics New Zealand. However, the consumer price index increased by 0.7% quarter-on-quarter, slightly below the 0.8% expected by economists polled by Reuters. Although the figures were softer than anticipated, annual inflation remained above the RBNZ's 1%-3% target range and exceeded the central bank's previous forecast of 3.9% by a smaller margin than expected.

Petrol prices were the largest contributor to inflation, while house-building costs also increased. This leaves policymakers facing a familiar dilemma: whether to look through the initial impact of higher energy prices or tighten monetary policy to prevent those increases from becoming embedded in broader prices and wage-setting.

Markets have increasingly anticipated another rate increase, with expectations pointing towards a possible 25-basis-point hike from the current 2.75% Official Cash Rate (OCR). Economists have also suggested that the RBNZ could prefer to act before the election rather than risk having to tighten more aggressively later if inflation proves persistent. Markets have priced in further tightening, with expectations pointing to a cumulative 50 basis points of increases by February.

However, the decision is not straightforward. Inflation came in below both market expectations and the RBNZ's forecast, while the economy continues to face the consequences of sluggish activity and elevated living costs. A rate increase could help anchor inflation expectations but would also raise borrowing costs for households and businesses, potentially weighing on an already fragile recovery.

The election adds another layer of uncertainty. Polling suggests a close and fragmented contest on November 7, with the composition of the next government likely to depend on smaller parties and subsequent coalition negotiations. Differences between potential administrations over public spending, taxation, labour regulation and infrastructure investment could influence the medium-term economic outlook and investor confidence.

The RBNZ does not set rates according to electoral considerations, but the political backdrop matters for markets. Uncertainty over the next government's fiscal priorities could affect bond yields, risk premiums and expectations for future growth. Investors will therefore be looking beyond the immediate rate decision to assess whether the central bank considers inflation risks sufficiently persistent to justify further tightening.

Bank of Canada: Will the Commitee Vote for the First Hike Since 2023?

The Bank of Canada is also confronting renewed inflation risks, and markets increasingly expect policymakers to raise the overnight rate from 2.25% to 2.50% on Wednesday. Such a move would represent the first increase since July 2023 and the first change in the policy rate in a year.

The central concern is the possibility that elevated energy prices will spread beyond fuel and transportation costs into a wider range of goods and services. Canada's annual inflation rate rose to 3.1% in September from 3.0% in August, largely reflecting higher energy prices. However, underlying inflation measures have been more reassuring, with core inflation measures easing below 2%, around the midpoint of the Bank's 1%-3% target range.

This divergence makes the decision particularly difficult. A rate increase could help prevent a temporary energy shock from translating into persistent inflation, especially if businesses pass higher transportation and production costs on to consumers. Yet tighter monetary policy would also increase borrowing costs at a time when the economy is showing signs of weakness.

Recent employment data have been disappointing, with the last two jobs reports wiping out employment gains recorded earlier in the year. Economic activity in housing, manufacturing and wholesale trade has also weakened, while the prospect of additional US tariffs threatens to create further uncertainty for Canadian exporters.

Governor Tiff Macklem has indicated that the central bank is prepared to act if higher energy costs threaten to make inflation more persistent. According to a Reuters survey, 19 of 34 economists expected a 25-basis-point increase at Wednesday's meeting, while money markets were also pricing in a hike.

The Monetary Policy Report released alongside the decision will be equally important. The Bank is expected to revise its inflation forecast substantially upwards for the coming year, reflecting persistently elevated crude oil and petroleum product prices. Traders will need to distinguish between an upward revision driven primarily by energy and a more concerning deterioration in the projected path of underlying inflation.

If policymakers expect inflation to return towards target without additional tightening, a rate increase could be presented as a precautionary measure rather than the beginning of an extended hiking cycle. However, evidence that price pressures are broadening could prompt a more hawkish outlook, including the possibility of further increases in 2027.

Federal Reserve: An October Pause, but Is December the Next Hike?

The Federal Reserve is widely expected to leave its benchmark interest rate unchanged at 3.75%-4.00% on Wednesday, following its September increase. However, a pause should not necessarily be interpreted as the end of the tightening cycle. Persistent inflation, resilient economic activity and higher energy costs have strengthened expectations that policymakers could raise rates again in December.

The latest Reuters economist poll illustrates the shift in expectations: 94 of 100 respondents anticipated an October hold, while all 100 expected a December hike. This represents a substantial change from September, when fewer than half expected another increase before year-end.

The challenge for the Fed is that inflation remains above its 2% target while higher energy costs are putting additional pressure on household budgets. Oil prices above $100 a barrel, alongside tariffs on imported goods, risk sustaining price pressures even as consumers face higher living expenses. At the same time, economic growth has remained relatively resilient, supported in part by investment linked to artificial intelligence and consumer spending.

Daily Brent Oil Chart - Source: TradingView

These conditions strengthen the case for further tightening, but they do not necessarily require an immediate move. Holding rates in October would allow policymakers more time to assess incoming data and the extent to which higher energy prices are feeding into broader inflation. A December increase would then provide an opportunity to respond if price pressures remain persistent.

For traders, however, the Fed's communication strategy has become an additional source of uncertainty. Under Chairman Kevin Warsh, the central bank has faced a debate over how much forward guidance it should provide. Warsh has signalled a preference for saying less about future policy decisions, arguing against the practice of repeatedly previewing possible moves. Several colleagues, however, believe the public still needs a clearer explanation of how the Fed will respond to changes in economic conditions.

This creates two separate questions for markets: how high rates may ultimately need to rise, and how much information policymakers will provide about that path in advance. Less explicit forward guidance could make it harder for investors to anticipate policy shifts, potentially increasing volatility in Treasury yields, the US dollar and other interest-rate-sensitive assets.

The October statement will therefore be scrutinised for changes in the Fed's assessment of inflation, economic activity and the balance of risks. Any indication that policymakers are increasingly concerned about persistent price pressures could reinforce expectations of a December hike. Conversely, an emphasis on uncertainty or the need to assess incoming data could temper those expectations without ruling out further tightening.

The Fed's challenge is to maintain its credibility on inflation without tightening too aggressively into an economy already facing higher household costs.

Sources: Reuters, CNBC, Westpac IQ, Bloomberg, Morningstar, The Wall Street Journal, Fed, RBNZ and BoC

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