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).
Figure 1: Monetary policy surprises: 2006 to 2023

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 (PDF, 857 KB)
- Financial markets
Key findings
- We find similar effects of a monetary policy surprise on the New Zealand dollar to previous research. Our results show that a +10 basis point monetary policy surprise is associated with a 0.5% appreciation in the New Zealand dollar 1 hour after an OCR announcement. This is very similar to the 0.4% appreciation found in previous work (Wong and Cook 2012).
- We find that there is a stronger relationship between monetary policy surprises and interest rate swaps than with the New Zealand dollar exchange rate. These effects persist up to one week after a monetary policy announcement and the effect is stronger for shorter-term interest rate swaps.
- We find some evidence that monetary policy surprises from Monetary Policy Statements have a slightly stronger and more persistent effect on financial instruments than from Monetary Policy Reviews. This could be related to the larger information set provided with these decisions.
- We also find evidence that monetary policy surprises have a persistent effect on the exchange rate after a week, but the precision of our estimates falls quickly as the event window lengthens. This reflects a wide range of influences on exchange rates over longer timeframes.
- We find that monetary policy surprises occur relatively infrequently. A material surprise is defined as a surprise as larger than or equal to 5 basis points in either direction. This has occurred at less than 1 in 5 monetary policy decisions over a near 20-year period.
Why we did this research
Changes to the OCR directly affect interest rates in the economy. Understanding the potential magnitude and persistence of this effect is important due to the role financial markets play in the transmission of monetary policy through to economic activity and inflation.
To increase our understanding of this effect we wanted to update and expand on past Reserve Bank research.
Reserve Bank research on this topic had not been updated since 2012. Since then, there have been a range of significant changes to global and domestic financial markets. We wanted to analyse whether any of these changes may have impacted how financial markets react to monetary policy surprises.
Past Reserve Bank research also tended to focus on the effect of a monetary policy surprise on the New Zealand exchange rate. By expanding on this to include the effect on other financial instruments, such as short-term interest rate swaps and cross-market interest rate swap differentials, we aim to deepen our understanding of financial market reactions to monetary policy surprises.
What data have we used?
We analyse the relationship between unexpected OCR changes and the New Zealand dollar, domestic interest rate swaps, and cross-market interest rate swap differentials.
Our sample period is from September 2006 to December 2023. We use hourly financial market pricing data to ensure the data observation windows (one hour, two hours, daily, and weekly) can be kept consistent given this sample period encompasses a change in announcement time.
Our data set consists of hourly data at ten minutes past every hour from September 2006 to November 2023. We exclude from our data the OCR decision at the start of the COVID-19 pandemic (16 March 2020) as this was an unscheduled announcement. We also exclude the OCR meeting on 30 July 2009 from our weekly data set due to data availability issues.
Media contact
Georgina Hassell-Hopkinson
Senior Adviser External Stakeholders
Phone:027 962 4044
Email: [email protected]