BNZ economists think the Reserve Bank will raise the Official Cash rate in September but won't express that intent when it holds its first OCR review for the year next week.
The economists think the RBNZ will remove any vestiges of an 'easing' bias from forward projections, but will incorporate just modest potential hiking, with the projected track of the OCR being about 10 basis points higher than when the central bank made its last set of forecasts (page 47) at the time of the last OCR review for 2025 on November 26.
The OCR is currently at 2.25%. Financial markets are pricing in about a 75% chance of a 25 basis-points rise (to 2.5%) by September.
In a preview of the first OCR decision for 2026, which is on Wednesday, February 18, BNZ head of research Stephen Toplis, said there is now little doubt the economic recovery is gaining momentum although "major headwinds" for the recovery mean the pace of expansion is likely to be constrained.
"But even with only modest growth, there are worrying signs that inflation is not as dead as one might expect it to be begging the question as to how low New Zealand’s potential growth rate might be. This will be the overarching conundrum the RBNZ faces into as it puts together its February 18 Monetary Policy Statement."
Toplis says the RBNZ's view of where the country's potential growth is, will be key to how it views the inflation outlook.
"The fact that inflation has not settled near 2.0% during a nasty recession suggests [growth] potential might be lower than expected. Additionally, the Bank [RBNZ] has assumed that labour force supply will be bolstered by rising migration but there is no sign of this."
On balance, Toplis thinks the RBNZ will be able to "get on top of inflation" and is forecasting annual CPI growth to move back to the 2% mid-point of the central bank's 1% to 3% target band.
"Nonetheless, taking everything into consideration, we still believe the Bank needs to reduce the extent of the current stimulus provided a little earlier than previously forecast.
"We believe the RBNZ will raise rates in September 2026 but, given current uncertainty, we do not predict it to express that intent at the upcoming meeting. We do expect it to acknowledge the pick up in growth and higher starting point for inflation but to still express confidence that inflation will come back to the mid-point of the target band but it is still expected to push back on market pricing which has a 25 points hike priced by October.
"Specifically, we expect the possibility of an easing to be removed from the Bank’s published interest rate track such that the low remains at 2.25% through to the December quarter. From there on in we would expect the track to be around 10 basis points higher than previously published," Toplis said.
He notes that the upcoming OCR review will be the first opportunity for new RBNZ Governor Anna Breman to "show her true colours".
"We should all be a lot wiser about her monetary policy thoughts, and those of a monetary policy committee no longer influenced by [former Governors] Adrian Orr or Christian Hawkesby, once the February MPS is published.
"Given this, the potential for commentator thought recalibration is probably larger than usual," Toplis said.
"Over time, given Anna Breman’s background, we would expect to see conservative, consistency benchmarked to whatever is delivered next week."
7 Comments
The ironic thing is that mortgage rates would probably be lower now had the RBNZ not made the last 0.25% cut and instead projected no change in 2026.
Why I was saying it was a mistake. Equally in 2022 - 2025 it could be said that interest rates would probably be lower then had the RBNZ not cut so insanely low for so long 2020-2021.
A lot of the time, the best thing the RBNZ can do is nothing. But they can't help themselves.
Inflation is a society wide economic poison. It must be stopped at all costs. If that reduces bank profits thru less frenzied property speculation to bad.
But housing price inflation at 7% p.a. endlessly (or decades) is worthy of celebration!! Not caution or restraint or sensibility. Its a sign of success. But anything else that goes up at that rate must be controlled very carefully.
Especially if you can leverage it and gains are tax free, happy days!!!
For the big 4 Banks it is business as usual.
Forget the OCR. They just want their profit margin regardless
Possible but wholesale rates were indicating last year that this was the most probably outcome.
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