Analytical Note: Financial Market Reaction To Monetary Policy Surprises

Monetary policy decisions that are not fully anticipated by financial markets (‘monetary policy surprises’) lead to changes in interest rates and the New Zealand dollar exchange rate.

A new Analytical Note measures monetary policy surprises and assesses their effects on financial market instruments.

Understanding the effects of monetary policy surprises on financial markets is key given the importance of central bank communication and the role financial markets play in the transmission of monetary policy.

The Analytical Note shows that material monetary policy surprises – defined as instances where market pricing for the OCR immediately prior to an announcement is more than 5 basis points different from the announced rate – are relatively rare. Since 2006, fewer than 1 in 5 OCR announcements resulted in a material monetary policy surprise (see red dots in Figure 1, below).

This Analytical Note assesses the impact of monetary policy surprises on specific New Zealand dollar exchange rates, domestic interest rate swaps and their spread to equivalent swap rates offshore. The authors find that monetary policy surprises have a similar effect on the New Zealand dollar as found in our previous research. That is, a +10 basis point OCR surprise is associated with a 0.5% appreciation in the Trade Weighted Index (TWI) one hour after an OCR announcement.

Additionally, this Analytical Note shows that there is some evidence that monetary policy 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 provided in Monetary Policy Statements.

More information

• Download the Analytical Note
• Financial markets

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