Most economists predict the Reserve Bank will start raising the Official Cash Rate from July, following a split vote at May's Monetary Policy Committee meeting

Reserve Bank (RBNZ) increases to the Official Cash Rate (OCR) appear a question of when, not if, with most economists expecting them sooner rather than later. 

The RBNZ left the OCR unchanged at 2.25% on Wednesday, despite half of the Monetary Policy Committee (MPC) voting to raise the cash rate by 25 basis points to 2.50%.

There are six MPC members, comprising three external members and three RBNZ members. All three external MPC members voted to raise the OCR on Wednesday. RBNZ MPC members Anna Breman, Karen Silk and Paul Conway voted to leave the OCR on hold because core inflation and wage growth remained contained and medium-and long-term inflation expectations were still around 2%.

External MPC members Carl Hansen, Hayley Gourley and Prasanna Gai voted for a 25-basis point increase due to concerns that the first round of indirect price increases from the impacts of the US-Iran conflict could become more broad-based, feeding through to a greater risk of second-round price increases.

In this instance, the chairperson – Governor Breman – had a casting vote, meaning the OCR remained on hold at 2.25%, despite the 3-3- split vote.

However, even though the RBNZ hasn’t moved the cash rate, the central bank has warned OCR increases are around the corner.

According to the May Monetary Policy Statement, all Committee members agreed that increasing the OCR at upcoming meetings would likely be necessary to ensure higher near-term inflation does not feed through to higher medium-term inflation.

“On balance, the OCR will most likely need to increase sooner and by more than envisaged in the February Monetary Policy Statement,” the RBNZ said on Wednesday.

“The pace of OCR increases will depend on the relative influence of persistent wage- and price-setting behaviour versus weaker economic activity on medium-term inflation pressures.”

The RBNZ now expects inflation to peak in the September quarter at 4.3% and to return to the 2% target midpoint in mid-2027. The RBNZ is still projecting that annual inflation will reach 4.2% in the June quarter, unchanged from the RBNZ’s April monetary policy review.

The central bank’s target inflation range is 1% to 3%, with a midpoint of 2%. 

In the May Monetary Statement, the RBNZ has forecast that the OCR will hit 2.7% in 2027 and 3.1% by 2028, which is up from 2.4% in 2027 and 2.7% in 2028 as projected in the RBNZ’s February Monetary Policy Statement.

‘A close-run thing’

BNZ head of research Stephen Toplis noted the Reserve Bank wanted to keep rates on hold but the rest of the MPC didn’t.

“So the cash rate was left unchanged. But they all agreed that rates will need to rise and rise soon,” he said.

Before Wednesday, BNZ was expecting an OCR hike in September, but Toplis now expects one sooner.

“On this basis, we bring forward our first rate hike to July with rate increases now pencilled in for every meeting until we reach the peak of 4.0%, that we have long been touting, in May 2027,” Toplis said.

ANZ chief economist Sharon Zellner said the May OCR decision was a “closer-run thing” than expected, but it had also confirmed ANZ’s expectation that the OCR will be lifted by 25 basis points in July – and very likely in September and October as well. 

“Beyond that point, while the RBNZ’s current best pick is that they will need to hike once more, to 3.25%, it is very early days,” Zollner said.

“The RBNZ still doesn’t have a great deal to work with when it comes to assessing the balance of risks around medium-term inflation.”

ASB chief economist Nick Tuffley said the RBNZ’s OCR forecast track suggests OCR increases from around July, which ASB economists described last week as the “sweet spot” to commence raising the cash rate.

“It’s a balancing act for the RBNZ,” Tuffley said. 

“One risk is leaving the OCR too low for too long, and having inflation take off – at the cost of having to lift the OCR more aggressively later on.  The other risk is lifting too soon, but while the OCR remains in stimulatory territory, that risk can be mitigated by simply pausing to see how risks pan out.”

‘Pretty much a done deal’

Infometrics chief forecaster Gareth Kiernan said it would be “very surprising” if the OCR doesn’t increase at the next review in July, given how close the RBNZ got to raising the cash rate on Wednesday.

“With four more meetings before the end of 2026, the OCR could reach 3.25% by December if the Reserve Bank lifts interest rates at every remaining opportunity this year,” he said.

“Perhaps the biggest debate now is about how much further tightening will be required during 2027. Although we recognise that weak demand conditions are limiting the ability of some firms to pass on higher costs, we still think the Bank is being overly optimistic about the speed with which inflation returns to the 2.0%pa mid-point of its target band,” Kiernan said.

“We expect more persistent price pressures will force the Bank to lift the OCR towards 4.0% during the first half of 2027.”

'Hike 'til it hurts what we think the RBNZ will do not what we think they should do'

Kiwibank had previously forecast that the RBNZ would start hiking in February 2027, but the bank now expects a cash rate hike in July. 

Kiwibank economists Jarrod Kerr and Alexandra Turcu said the RBNZ’s decision in July starts at a 50/50 split from today, while the September MPS decision is “pretty much a done deal”.

“The data out between now and July is likely to be inconclusive at best. But it’s another step towards agreed rate hikes,” they said.

“As a result, we have to say what we think the RBNZ will do (hike ‘til it hurts)… not what we think they should do (pause to assess).”

Westpac is the lone retail bank that thinks it's more likely the RBNZ will wait until September instead of July to start increasing the OCR. 

'External members have swung decidedly hawkish'

Westpac chief economist Kelly Eckhold said the RBNZ makes a strong case for a higher OCR this year but is “delaying action.”

“We continue to expect no change in the OCR in July and 25 basis points hikes in September, October and December. Our longer-term OCR forecasts remain unchanged,” he said.

“A July hike can’t be ruled out and probably hinges on the strength of the economy and the assessment of the level of excess capacity that comes to light between now and July. We suspect their concerns on further downside risks will be borne out.”

According to Eckhold, Governor Breman’s vote on Wednesday was “in line” with her previous messaging, which he said strongly suggested a high bar to consider lifting the OCR. 

“It seems sensible to assume she will continue to pursue that strategy,” he said. “The big surprise was that it was the external members that have swung decidedly hawkish. That’s telling, but the internal consensus needs to flip to get the tightening cycle going.”