Economists are warning the Official Cash Rate (OCR) could climb back to 4% by 2027, as the Reserve Bank’s looser policy settings risk overheating the economy next year.
In a note released on Friday, Infometrics said it expects the OCR to hit 3% by mid-2027, with a risk it could go higher.
Chief forecaster Gareth Kiernan said the Reserve Bank (RBNZ) was “walking a fine line” between reigniting growth and overheating the economy, warning that stimulus already in the system will peak around mid-2026.
“There is an increasing chance that monetary policy is again overdoing the stimulus and exacerbating future ups and downs in the economic cycle,” he said.
Infometrics expects GDP growth to reach 2.3% by early 2027, with per capita growth comfortably above the 1.4% a year average of the 2010s.
“We expect households to respond with stronger spending growth in the near term, and we also see faster growth in business investment and residential construction in 2027. A new round of monetary policy tightening is likely to be needed from late 2026 to get interest rates back to neutral.”
“An official cash rate of 4% by the end of 2027 to bring economic growth back to a more sustainable rate is not our central view, but it’s not out of the question either,” he said.
Big calls
Economists from NZ’s big banks mostly welcomed the extra rate cuts. Kiwibank’s team said the RBNZ was “finally hearing the struggles of Kiwi businesses”, while ASB described it as a “clear-cut decision and the right one”.
But Infometrics was not alone in raising concern. Salt Funds chief economist Bevan Graham also said he was worried the RBNZ was overdoing it.
He said the 50 basis point cut in October was a “double handful of fertiliser” on the so-called ‘green shoots’, but the stimulus would be constrained by NZ’s weak potential growth rate.
“The upshot of that is that once the current, and admittedly large, amount of spare capacity in the economy is used up, we will likely hit growing pains quite early, requiring the bank to step on the brakes again quite soon, possibly quite aggressively.”
Graham said the neutral OCR was likely between 3% and 3.5%. The further it drops below that range, the sharper the hikes that may follow. He said borrowers, home buyers, and investors should not expect current low rates to last beyond early 2027.
“I do wonder if the RBNZ is in a pattern of exacerbating the economic cycle to smooth inflation. It would be great if we’re not sitting here in a year’s time debating whether the RBNZ over did it again. Again – only time will tell.”
Zealots on balance
SFS Private Wealth chief investment officer John Carran also questioned whether the RBNZ was being “overzealous” by moving the OCR too far and too fast.
“A more incremental approach, with further OCR cuts contingent on evolving economic and inflation signals, may deliver a more sustainable economic path than we've seen lately,” he said.
The RBNZ’s 50 basis point cut was unanimously backed by the Monetary Policy Committee, suggesting none of its members strongly shared those concerns.
RBNZ Chief economist Paul Conway told Interest.co.nz there was a “good chance” inflation could break out of the 1% to 3% target band this quarter, but also a risk of a “prolonged period of excess capacity”.
He said the double cut was meant to “rebalance” those risks after weak data releases, and that there was no guarantee of further easing now the outlook was more balanced.
Economic commentator Tony Alexander said the surprise cut had sparked a strong reaction in one of his regular surveys, with the net share of people planning more purchases in the next three to six months rising from -1% to +14%.
“This is the best result in almost four years and shows light at the end of a long tunnel for the beleaguered retail and hospitality sectors. But note how quickly the +10% of December 2024 disappeared; the missing element still is employment confidence,” he said.
If the enthusiasm holds, it will add to other stimulatory forces now being unleashed on the economy.
Infometrics said the government was likely to accelerate infrastructure delivery ahead of next year’s election, while strong export prices should keep supporting provincial growth through 2026.
That raises the risk inflation won’t fall from 3% as quickly as forecasters expect, potentially forcing the RBNZ to lift the OCR back above neutral sooner than planned.
Conway said he worries about inflation expectations becoming embedded but doesn’t see underlying pressures as particularly strong. He said inflation would be at 2% if non-market prices such as council rates and car registration fees were excluded from the Consumers Price Index.
He added that the neutral OCR was a moving target, and not a fixed point interest rates must return to in the future.
“It’s more of a zone than a specific number. And in different markets that are influenced by interest rates, neutral can be different. I think it’s a rough approximation of an abstract concept,” he said.
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