Bank economists split on October rate hike as RBNZ’s dovish shift signals a potential cash rate pause before the November 7 election

Bank economists are divided on whether the Reserve Bank (RBNZ) will go three for three and deliver a third consecutive Official Cash Rate (OCR) hike in late October, ahead of New Zealand’s general election in early November.

The Reserve Bank raised the OCR by 25 basis points for the second consecutive monetary policy review on Wednesday, raising it to 2.75% from 2.50% in a widely anticipated move.

The six members of the RBNZ’s Monetary Policy Committee (MPC), made up of external and internal central bank members, reached “clear consensus” on the back-to-back cash rate hike according to the RBNZ.

“All members agreed that gradually removing monetary stimulus is consistent with achieving the medium-term inflation target, conditional on the outlook.”

In the RBNZ’s September Monetary Policy Statement (MPS), the OCR is now expected to peak at 2.6% in 2027, 3.1% in 2028 and 3.2% in 2029. It’s barely changed from the May MPS forecasts, where the RBNZ expected the OCR to peak at 2.7% in 2027, 3.1% in 2028 and 3.2% in 2029.

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, above the RBNZ’s projection of 3.9%. 

Statistics NZ is set to release September quarter CPI on October 22, with the RBNZ projecting annual inflation to come in at 3.9%. In the RBNZ’s September Monetary Policy Statement (MPS), annual inflation is now expected to peak at 3.7% in 2027, 1.9% in 2028 and 2.0% in 2029.

More chirp than screech

Following the September OCR announcement, Kiwibank economists Jarrod Kerr, Alexandra Turcu and Elliott Lowe described the September hike arriving “with a surprisingly dovish chirp as opposed to a hawkish screech.”

The Kiwibank trio said the chance of a hike in October is “actually lower now” due to the monetary policy committee conveying a tone of ‘wait and see’ after two consecutive hikes.

“Following the RBNZ’s decision, a 25 basis point hike in October is just over one-third priced in. We like these odds. We had thought that they would deliver a three-step move to 3%. But we may not get a pause at 2.75% to assess…sounds sensible to us.”

The September MPS found that inflation pressures have eased since the May MPS, when ongoing geopolitical conflict in the Middle East was driving up global oil prices.

“Despite volatility, the worst of the direct inflation spike due to fuel prices looks to be behind us,” the Kiwibank economists said.

“The Reserve Bank can’t wave a magic wand and control oil prices. But they can use interest rates to limit the extent to which inflation spreads throughout the economy.”

BNZ head of research Stephen Toplis said “anything else would have been flabbergasting” if the RBNZ hadn’t opted to raise the OCR to 2.75% on Wednesday.

“We maintain our view that if there is reason to raise rates again by the end of the year, and the current cash rate is below neutral, then there is little sense in pausing in October and resuming in December, yet that is exactly what the RBNZ’s interest rate track implies,” he said.

This means BNZ is “reluctantly” dropping its expectation that the Reserve Bank will hike the OCR again in October.

Despite the relatively dovish nature of Wednesday’s commentary, RBNZ Governor Anna Breman made it clear that another rate increase is likely but the timing is uncertain, Toplis said.

He added that given the Reserve Bank’s messaging, the market is likely to quickly price out October, which will provide further justification for the Bank to pause.

“If the Bank had wanted to send a message that October was very live, it could have. Instead, it went out of its way not to,” Toplis said.

A prompt return to neutral

Westpac chief economist Kelly Eckhold said the RBNZ remains “resolved” to adjust the OCR higher.

“But for now that looks more like a discussion for December as opposed to a discussion that will necessarily occur in both October and December,” Eckhold said.

The RBNZ described raising the OCR to 2.75% at the September meeting as a decision that reduced the risk the OCR needs to be increased further down the track, but future policy decisions will depend on the Committee’s judgement of the balance of risks to medium-term inflation.

“Conditional on the central economic outlook, members judged that the OCR may need to increase further,” the RBNZ said.

According to Eckhold, the majority of the MPC seeing upside risks to inflation should keep the option to hike the OCR further “firmly on the table for the foreseeable future.”

“Nonetheless, there remains caution about the strength and breadth of the economy, so the MPC will want to see more evidence on the durability of the recovery before committing to a lot more OCR hikes,” Eckhold said.

Eckhold said the current projection of a pause to the OCR in October and then another hike in December remains Westpac’s base prediction.

ANZ NZ chief economist Sharon Zollner said while an OCR hike in October is more data dependent than had the RBNZ set it up explicitly, ANZ is still sticking with this bet.

“We certainly don’t think the RBNZ intended to rule it out. After all, four members of the Committee saw inflation risks as tilted to the upside of their updated forecasts (two were balanced), suggesting it wouldn’t take too much to tip the Committee towards thinking a prompt return to neutral [an OCR of 3%] is the most prudent path. We don’t see election timing as a particularly relevant consideration,” she said.

The next OCR decision will be on October 28, while NZ’s general election is set for November 7, 10 days later.

“As before, our suspicion is that the OCR will ultimately need to go higher than 3% to balance upside and downside risks to inflation, but we are keeping open minds on that point,” Zollner said.

Upside versus balanced

The inflation risks Zollner and Eckhold point to were an interesting standout in the September meeting as they revealed a split in views among the six internal and external committee members.

External members Hayley Gourley and Prasanna Gai alongside internal members Karen Silk and Breman saw “upside risks” to inflation relative to the central projection, while internal member Paul Conway and external Carl Hansen saw inflation risks as “balanced.”

All members, however, agreed that the downside risks to activity were significant and that the
recovery “could remain uneven.”

Since the May MPS, the Reserve Bank has started publishing instances where members have major differences of opinion in its records of meetings, as well as making the votes of the Reserve Bank’s MPC votes publicly available.

ASB senior economist Mark Smith said ASB expects a follow-up 25 basis point hike in October and December, with the OCR ending the year at 3.25%. ASB then anticipates it will remain at 3.25% over 2027.

“Risks are tilted toward more gradual tightening being delivered by the RBNZ, but conditions can change quickly,” he said.

“Ultimately, the inflation outlook will have the final say and we have some sympathy with the upside risk assessment to the inflation outlook shared by the majority of MPS members.”