Kia ora, I’m Rachael, a researcher here at Te Pūtea Matua.
Our new analytical note shows that monetary policy decisions that surprise financial markets lead to changes in interest rates and the New Zealand dollar exchange rate.
Material monetary policy surprises are where financial markets’ expectation and pricing of the Official Cash Rate – or OCR – immediately before an announcement is more than five basis points different from the actual announced rate. Material surprises are not common.
Since 2006, less than 1 in every 5 OCR announcements came as a material market surprise. In this chart here you can see a number of surprises, as shown in the red dots above and below the line.
For example, we can see this during the global financial crisis here.
We know that communication as a central bank helps monetary policy to be more effective.
So understanding the effects of surprises on financial markets is important for us here at the Reserve Bank.
We found that an OCR surprise that was ten basis points above expectations, would lead to a 0.5% rise in the New Zealand Dollar exchange rate, in the first hour after an OCR announcement.
We also found evidence that OCR surprises from Monetary Policy Statements have a slightly stronger and more persistent effect on financial instruments than surprises from Monetary Policy Reviews. This could be related to the larger information set published during Monetary Policy Statements.
To learn more, you can find the full research on our website.
