ASB changes tack on the Reserve Bank's Official Cash Rate outlook, now expects July OCR pause as US-Iran Memorandum of Understanding cools oil prices

ASB now expects the Reserve Bank (RBNZ) to keep the Official Cash Rate (OCR) on hold in July but predicts another close vote.

The bank's economists have revised their OCR outlook after previously forecasting the RBNZ would start hiking the OCR when it's next reviewed on July 8.

“We do not expect the decision to be unanimous, with a split vote highly likely again,” ASB senior economist Mark Smith said on Friday.

ASB’s change of OCR heart boils down to two factors: the recent US-Iran developments and the “hurdle” for internal members of the RBNZ's Monetary Policy Committee (MPC) not appearing to have been cleared.

"Recent US-Iran developments, while fragile and uncertain, appear to be consequential. They look to have reduced upside risks to NZ medium-term inflation by lowering the risk of sustained cost shocks filtering through into wider price and wage settings. Second, and as a consequence, the hurdle for the internal Monetary Policy Committee members, who hold the balance of power, to switch to vote for an OCR increase does not look to have been cleared. These members will want to wait for more confirmation of potential medium-term inflation impacts before deciding to move the OCR. We think this hurdle, at its earliest, can be cleared by the September Monetary Policy Statement," Smith says.

In May the three MPC external members voted for a 25 basis points increase and the three internal members voted to keep the OCR at 2.25%. RBNZ Governor Anna Breman used her casting vote to secure a hold.

ASB has now forecast the RBNZ will roll out a steady sequence of 25 basis point hikes starting from September, with the OCR ending this year at 3.0% and peaking at 3.25% by early 2027.

There are four more OCR reviews left in 2026, occurring in July, September, October and December.

“The outlook for NZ inflation has changed meaningfully since the May Monetary Policy Statement (MPS). It is still early days, and much can happen, but the US-Iran Memorandum of Understanding looks to have been a consequential development that has significantly tempered the uplift and duration of high oil prices,” Smith said.

“Lower oil prices, if they persist, lower the 2026 peak in inflation and reduces the risk of higher energy prices filtering into inflation over the medium term. A sharp reversal in NZ fuel prices can conceivably push annual CPI [consumers price index] inflation well below 2% temporarily in mid-2027.”

The RBNZ targets an annual inflation rate of between 1% and 3%. Headline inflation in New Zealand was last in that target band back in the September 2025 quarter, when it came in at 3%. In the December 2025 quarter and March 2026 quarter, annual inflation rose 3.1%. Economists expect it to top 4% in the June quarter.

When the RBNZ decided to hold the OCR at 2.25% in May, many economists were pencilling in a cash rate hike at the OCR meeting in July.

According to the May MPS, the six 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.

Smith said on Friday that the May MPS guidance was conditional upon an oil price outlook that was significantly higher for a longer period than now appears likely. 

“And although geopolitical developments are fickle, we do think it’s prudent, and likely, that the RBNZ acknowledges that the risks to its oil projections, and therefore wider, near-term inflationary pressures, have changed. We don’t feel the MPC will feel beholden to stick to earlier guidance or the OCR outlook implied by the May MPS,” he said.

“In this gyrating environment, the range of risks is spread across an earlier start and still-rapid tightening through to a more gradual pace of increases to a more moderate peak.”

Not a slam dunk

ASB’s prediction is more cautious than that of investment bank UBS, which earlier this week said it expects the RBNZ to increase OCR in July, with the MPC vote shifting towards a more unanimous one. 

“The case for early and pre-emptive hikes is that inflation is too high, and hence monetary stimulus needs to be removed,” UBS economist Stephen Wu said.

Westpac NZ economists agree with ASB, however, that the RBNZ will hold the OCR at 2.25% in July.

“Indeed, we expect this decision to be far less contentious than in May, and don’t rule out that this decision is made by consensus and so without a vote,” they said on Thursday.

Westpac is forecasting that the RBNZ will begin to tighten at the September MPS. 

“However, beyond September, we now expect just one further tightening this year – rather than two – which will probably occur at the December MPS meeting,” the economists said.

ANZ forecast last week that an OCR hike was no longer the “slam dunk” it previously was.

"On balance, having worked so hard to set up a July hike, we still think the Reserve Bank will deliver it, but it is certainly not the (near) slam-dunk it was. We are also still comfortable forecasting a follow-up hike in September, but we would characterise it as more data-dependent than previously," ANZ economists Matthew Galt and Sharon Zollner said.