For the second monetary policy meeting in a row, the Reserve Bank (RBNZ) has raised the Official Cash Rate (OCR) by 25 basis points, increasing it to 2.75% from 2.50%, with the six members of the RBNZ’s Monetary Policy Committee (MPC) reaching “clear consensus.”
The committee determined that gradually removing monetary stimulus is necessary to return inflation to the RBNZ’s 2% inflation target midpoint and support growth and employment, while avoiding unnecessary instability in output, employment, interest rates and the exchange rate.
“This decision reduces the risk that the OCR needs to increase by more later. Future policy decisions will depend on the Committee’s judgement of the balance of risks to medium-term inflation,” the RBNZ said.
All members agreed in the meeting that the “central projection” for the OCR is appropriate, but noted that the future OCR path is “not pre-determined.”
“Conditional on the central economic outlook, members judged that the OCR may need to increase further,” the RBNZ said.
“The Committee’s response to data is not mechanical, as it depends on its assessment of various factors that impact inflation. Currently, indicators of medium-term inflation are consistent with inflation returning to target.”
The OCR is the RBNZ’s main tool for keeping inflation between 1% and 3%, with a target point of 2%.
Annual inflation, as measured by Statistics NZ’s Consumers Price Index (CPI), increased to 4.1% in the June quarter – the highest annual inflation rate NZ has seen since December 2023. The latest annual CPI inflation figure was above the RBNZ’s projection of 3.9% for the June quarter. Statistics NZ is set to release September quarter CPI on October 22.
The RBNZ said on Wednesday that it still expects inflation to return to its 1% to 3% target band by mid-2027 and the 2% target midpoint later next year.
The RBNZ's decision to hike the OCR again was widely anticipated, with economists at the country’s largest banks all predicting beforehand that the RBNZ would announce another 25 basis point increase.
‘More sticky inflation’
According to the summary of the MPC meeting, members Hayley Gourley (external), Karen Silk (internal), Prasanna Gai (external) and RBNZ Governor Anna Breman (internal) saw upside risks to inflation relative to the central projection.
“These members observed that more persistence in energy and petrochemical prices could raise near-term inflation risks, impact price-setting behaviour, and lead to more sticky inflation over the medium term. Price-setting can be a front-loaded process, meaning businesses could raise domestic prices more than import costs warrant,” the Reserve Bank said.
“They also noted that high administered price inflation could continue. These factors increase the risk that monetary policy needs to lean against broader inflation pressures.”
In contrast, MPC members Paul Conway (internal) and Carl Hansen (external) saw inflation risks as balanced. While both shared concerns that high inflation could become embedded through price-setting behaviour, they saw activity risks as “skewed to the downside” and noted that these could weigh on inflation. Conway and Hansen also highlighted the potential effects of “weak house prices and precautionary behaviour” weakening growth in household spending.
All members agreed in the meeting that downside risks to activity were significant and that the recovery could remain uneven.
A ‘modest recovery’ in house prices is expected
According to the Reserve Bank, committee members agreed that economic growth was “lacklustre” in the June quarter, with the economic recovery expected to resume in the third quarter. However, the committee anticipates this growth will continue to remain “uneven” across sectors and regions.
While economic conditions remain more favourable for households and businesses exposed to the export sector, the committee noted that the “positive spillovers” from the export sector into the broader economy have been limited.
“Households and businesses more exposed to the domestic economy continue to face challenging conditions,” the RBNZ said.
The committee assessed that employment growth hasn’t been sufficient to fully absorb new entrants into the labour market and unemployment remains “elevated.” In the June quarter, NZ’s unemployment rate climbed to 5.6%, the highest it has been for more than a decade and above the RBNZ’s projection of 5.4%.
“The labour market is expected to slowly improve, with employment growing and unemployment falling as the economy recovers,” the RBNZ said.
“A pick-up in real income growth and a modest recovery in house prices supported by past and current monetary stimulus is expected to strengthen household balance sheets, consumer confidence and spending. Improvements in the terms of trade from next year will also support national income growth over the forecast period.”
This is the statement from the Reserve Bank:
The Monetary Policy Committee today reached consensus to increase the OCR to 25 basis points to 2.75 percent.
Inflation increased to 4.1 percent in the June quarter because of higher fuel prices arising from the conflict in the Middle East. Core inflation, expected wage growth, and inflation expectations remain consistent with inflation returning to the 1 to 3 percent target band by mid-2027 and the 2 percent target midpoint later next year.
After lacklustre growth in the June quarter, New Zealand's economic recovery has most likely resumed but remains uneven. Resilient demand from New Zealand’s trading partners and strong export prices are supporting income growth and investment in export-exposed sectors and regional New Zealand. In contrast, weak income growth, job insecurity, and flat house prices continue to weigh on household spending and residential investment, particularly in Auckland and Wellington.
The recovery is expected to strengthen and broaden. The Committee expects New Zealand’s export sector to remain resilient and household spending to gradually increase. Conditions in the labour market should improve as the recovery gathers pace. Purchasing power will increase as inflation returns to the 2 percent target mid-point.
The global economy is facing significant risks that could affect commodity prices and demand for exports. New Zealand’s economic recovery could be stronger or weaker than expected and price pressures could generate more persistent inflation. The Committee remains vigilant and will respond as necessary to ensure inflation returns sustainably to the 2 percent target mid-point over the medium term.
The Committee judges that gradually removing monetary stimulus is appropriate to return inflation to the 2 percent target mid-point while supporting growth and employment. This decision reduces the risk that the OCR needs to increase by more later. Future policy decisions will depend on the Committee’s judgement of the balance of risks to medium-term inflation.
Summary of Monetary Policy Committee meeting:
Annual consumers price index inflation is above the Monetary Policy Committee’s 1 to 3 percent target range. Inflation increased to 4.1 percent in the June 2026 quarter, largely driven by higher fuel and related prices due to the Middle East conflict. The Committee is setting monetary policy to return inflation to 2 percent by late 2027. Economic activity is expected to strengthen and broaden.
Inflation is forecast to fall to 2 percent by late 2027
The Committee expects inflation to remain elevated this year before returning to the target band by mid-2027 and reaching the 2 percent mid-point later next year. Excluding vehicle fuels, annual CPI inflation decreased to 2.9 percent in the June quarter. Most measures of core inflation are within the 1 to 3 percent target band.
As the effects of higher fuel prices drop out of the annual CPI calculation, spare capacity and the gradual removal of monetary stimulus are expected to support inflation returning to the 2 percent target mid-point.
Forward-looking indicators of inflation and spare capacity are consistent with achieving the medium-term target. Longer-term inflation expectations remain near 2 percent, while most measures of one- and two-year-ahead inflation expectations have fallen since May. Expected wage growth is consistent with returning inflation to 2 percent.
Trading partner inflation has increased and export prices remain resilient
High and volatile energy and petrochemical-derived product prices have increased inflation in many of New Zealand’s trading partners, increasing import prices. Global supply chains, refining capacity, and trade flows remain disrupted.
Despite recent geopolitical events, economic growth in New Zealand’s trading partners has remained resilient and the outlook has improved. Continued demand and supply-side constraints in global food markets have resulted in elevated prices for New Zealand’s commodity exports. This is partly offsetting higher import prices, and New Zealand’s terms of trade are projected to resume their long-run upward trend.
New Zealand’s economic recovery is resuming and expected to broaden
The Committee assessed that growth was lacklustre in the second quarter of 2026. The economic recovery is expected to have resumed in the third quarter, while remaining uneven across sectors and regions.
The Committee noted that economic conditions remain favourable for households and businesses exposed to the export sector, contributing to a recovery in business investment. Resilient trading-partner demand and strong export prices are supporting activity in the South Island and some North Island regions.
The Committee assessed that positive spillovers from the export sector into the broader economy have been limited. Households and businesses more exposed to the domestic economy continue to face challenging conditions.
Employment growth has not been sufficient to fully absorb new entrants into the labour market and unemployment is elevated, particularly in Auckland and Wellington and for youth and the long-term unemployed. Some households are moving to regions with stronger labour markets as part of this economic adjustment.
In some regions, job insecurity and falling real house prices may be contributing to precautionary behaviour. Household saving rates have increased and consumption growth remains weak. Strong growth in dwelling consents has not yet translated into residential construction nationwide.
Household consumption growth is expected to gradually strengthen. The labour market is expected to slowly improve, with employment growing and unemployment falling as the economy recovers. A pick up in real income growth and a modest recovery in house prices supported by past and current monetary stimulus is expected to strengthen household balance sheets, consumer confidence and spending. Improvements in the terms of trade from next year will also support national income growth over the forecast period.
On balance, the Committee assesses that spare capacity remains in the economy, particularly in the labour market. Looking forward, strength in the external sector and the effects of accommodative monetary policy will continue to support and broaden the recovery, absorbing spare capacity over the medium term.
Financial conditions have tightened in recent months
Domestic financial conditions have tightened. Higher wholesale interest rates have led to a comparable increase in bank mortgage and business lending rates and a small appreciation in the exchange rate, partly reflecting expectations of future OCR increases.
The Committee noted a more limited pass through of higher wholesale interest rates to term deposit rates, which is lowering the cost of new funding for banks. A greater pass through to deposit rates would be more consistent with the desired stance and transmission of monetary policy.
Members agreed that domestic financial stability continues to pose no material trade-off to its inflation objective.
Risks to global and domestic economic growth
The Committee discussed risks to the global outlook. There are significant risks to financial stability from the serviceability of public and private debt and ongoing fiscal deficits. Geopolitical instability also continues to present considerable risks. Uncertainties remain about the sustainability of various asset valuations, including for AI-related investments.
El Niño weather conditions do not necessarily imply that New Zealand will experience a drought. However, adverse global and local weather events can impact supply, posing upside risk to commodity and food prices. Although risks to the global economy remain heightened, the Committee expects global economic conditions to remain favourable for New Zealand’s export-facing businesses over the medium term.
Members discussed risks to New Zealand’s economic recovery. Consumption growth could be subdued if employment and house price growth remain weak, or if precautionary behaviour persists. If this were to occur, the recovery could be weaker and current unevenness could continue. Alternatively, consumption growth could be stronger and absorb spare capacity faster than currently anticipated.
Members highlighted that the real economy is showing signs of adjusting to a range of structural changes, but transitions can be slow and contribute to divergences across sectors and regions. It was noted that monetary policy cannot influence the ultimate path of these real adjustments.
The Committee remains vigilant to inflation risks
The outlook for medium-term inflationary pressures depends on price-setting behaviour and the speed with which spare capacity in the economy is absorbed. Recent elevated inflation is expected to continue to impact price setting, keeping inflation more persistent than otherwise.
Hayley Gourley, Karen Silk, Prasanna Gai and Anna Breman saw upside risks to inflation relative to the central projection. These members observed that more persistence in energy and petrochemical prices could raise near-term inflation risks, impact price-setting behaviour, and lead to more sticky inflation over the medium term. Price-setting can be a front-loaded process, meaning businesses could raise domestic prices more than import costs warrant. They also noted that high administered price inflation could continue. These factors increase the risk that monetary policy needs to lean against broader inflation pressures.
Paul Conway and Carl Hansen saw risks to inflation as balanced. These members shared concerns that high inflation could become embedded through price-setting behaviour. But weighed against this, they saw activity risks as skewed to the downside and noted that these could weigh on inflation. They highlighted the potential effects of weak house prices and precautionary behaviour, weakening growth in household spending.
All members agreed that downside risks to activity were significant and that the recovery could remain uneven. They also noted growth in activity may not flow through into additional employment as expected, particularly if businesses are relatively more focused on efficiency and technology investment in the short run.
Gradually removing monetary stimulus remains appropriate
The Committee discussed the monetary conditions required to return inflation sustainably to the 2 percent target mid-point.
When considering the policy response at this meeting, there was a clear consensus across the Committee. All members agreed that gradually removing monetary stimulus is consistent with achieving the medium-term inflation target, conditional on the outlook.
Members reflected on the potential trade-offs associated with a faster or slower monetary policy response. The Committee judged that its response balances containing inflationary pressures against the risk of holding the OCR and then having to raise it faster and to a higher level later.
All members agreed that the central projection for the OCR is appropriate. Conditional on the central economic outlook, members judged that the OCR may need to increase further. The Committee assessed that its monetary policy stance would guard against the effects of the oil price shock leading to persistently elevated price-setting behaviour, while supporting growth and employment.
However, the future OCR path is not pre-determined. The Committee’s response to data is not mechanical, as it depends on its assessment of various factors that impact inflation. Currently, indicators of medium-term inflation are consistent with inflation returning to target.
The Committee decided by consensus to increase the OCR by 25 basis points to 2.75 percent
The Committee judged that increasing the OCR to 2.75 percent is appropriate to sustainably return inflation to the 2 percent target mid-point while avoiding unnecessary instability in output, employment, interest rates and the exchange rate.
Future policy will depend on the Committee’s judgement of the balance of risks to medium-term inflation. This approach allows the Committee to observe and assess the effects of reduced monetary stimulus.
On Wednesday 2 September, the Committee decided by consensus to increase the OCR by 25 basis points to 2.75 percent.
We welcome your comments below. If you are not already registered, please register to comment
Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.