Economists are projecting a 25 basis point Official Cash Rate (OCR) increase at the Reserve Bank’s December 9 monetary policy review but some say it's not a done deal.
The Reserve Bank (RBNZ) held the OCR at 2.75% on Wednesday, a shock to bank economists and financial markets as they expected the OCR to be increased to 3% to combat inflation and a weak NZ dollar.
Following the RBNZ’s OCR announcement, the New Zealand dollar fell 75 basis points against the US dollar, and 100 basis points against the Australian dollar.
‘Frankly flabbergasted’
BNZ economists were “frankly flabbergasted” by the RBNZ’s decision to leave interest rates on hold.
“While central banks are not obliged to follow market pricing and/or the consensus, it is rare that they move diametrically against them," BNZ's head of research Stephen Toplis said.
“In doing so the RBNZ has added to inflationary pressure instantaneously by encouraging an already soft New Zealand dollar to fall further."
‘We think it’s likely that we will do further increases at [the] coming meetings’
The decision to hold the OCR had committee members split in a 4-3 vote.
RBNZ Governor Anna Breman and fellow internal RBNZ committee member Rebecca Williams, plus external members Carl Hansen and Prasanna Gai voted to keep the OCR at 2.75%, saying the July and September increases allowed the committee to take more time to assess their effects and economic developments.
Meanwhile external member Hayley Gourley, RBNZ chief economist Paul Conway and RBNZ Assistant Governor Karen Silk favoured increasing the OCR by 25 basis points. They argued that core inflation has been "above levels consistent with headline inflation at the [2%] target mid-point for some time," increasing the risk of "inflation becoming entrenched in price-setting behaviour."
However the committee as a whole agreed that tighter monetary policy was likely to be required but remained conditional on the outlook. And at a press conference in Auckland, Breman told reporters: “We think it’s likely that we will do further increases at [the] coming meetings.”
Committee members differed in how much weight should be placed on various risks and the timing of monetary policy response.
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 3.7% in the September quarter, below the RBNZ’s projection of 3.9%. While headline inflation had dropped from the June quarter, the signal on underlying inflation pressure had raised concerns amongst many economists and added to their expectations of an October OCR hike.
‘The pause in rate moves is nothing more than a tease’
BNZ's Toplis said: “A major surprise was that the [Reserve] Bank paused even though it reiterated that ‘further OCR increases [are] likely’. The key in this statement is the plural on increase. If more than one increase is likely, why would you wait?”
“Moreover, the RBNZ, for all intents and purposes, states that its core view is that rates will need to be raised in December.”
Toplis said the overarching feeling was that the RBNZ had been spooked by the potential for international events to turn sour and had applied a "very high weight" to this.
"We are increasingly concerned that the new Governor is placing too much emphasis on international developments and not enough on local."
“The pause in rate moves is nothing more than a tease," he said.
“The RBNZ Christmas present to the nation will be a 25 point cash rate increase on December 9. With a high risk that even more aggression in rate hikes will be needed than is now forecast."
BNZ economists were sticking with their view that the OCR would peak at 3.75% with its current track having 25 basis point moves at forthcoming meetings to get there.
“It is clear the nervous Nellies at the Bank will not do this. The problem is that we can’t pick which meetings this nervous disposition will dominate so we don’t know where to put in any pauses. On this basis, you can expect that it will take longer to get to the top than we are projecting.”
ASB senior economist Mark Smith is concerned that inflation over 2027 could prove slow to recede.
“Higher for longer inflation is a major headache for the RBNZ as it risks pressuring inflation expectations and other nominal anchors higher.”
ASB economists are projecting a three consecutive 25 basis point hikes in December, February 2027 and March 2027, and a 3.50% OCR peak.
“The OCR could easily follow a different route. If medium-term inflation indicators - including wages, inflation expectations and capacity metrics - remain contained, a more drawn out path of OCR tightening is possible,” Smith said.
“However, we are less benign on the inflation outlook and view the risks to the OCR as tilted further to the upside after today’s dovish hold.”
‘A December hike is not a done deal’
Westpac chief economist Kelly Eckhold said how the RBNZ’s policy stance evolves between now and December 9 will depend on both international and domestic factors.
The committee had clearly become more concerned about risks to the global economic outlook, stemming from geopolitical events, high energy prices, high and rising public and private debt levels and uncertainty about whether the surge in AI investment will be justified by economic fundamentals, Eckhold said.
“So, the RBNZ will pay close attention to any developments that suggest that downside risk to the global outlook is materialising.”
There are several domestic economic indicators in the lead up to the RBNZ’s December 9 decision and those include labour market data, RBNZ surveys, the Selected Price Indexes, ANZ’s Business Outlook and October’s Purchasing Managers’ Index (PMI) and Performance of Services Index (PSI) surveys.
Westpac economists are expecting a 25 basis-point hike in December, and continue to expect an eventual peak of 4% in September 2027.
“However, a December hike is not a done deal and will depend on data on fuel prices, inflation expectations and second-round pricing pressures and information on evolving global economic risks that accumulate in the next six weeks.”
'Something has spooked members of the committee'
Brad Olsen, principal economist at economic consultancy Infometrics, said; “the Committee weighed up between a raise in October versus December, noting by December that it would have more information and data that ‘could meaningfully change the appropriate policy stance in either direction,’ and that a pause would provide time to assess how the prior two raises have changed things.”
“For now, we retain our forecast of a December 2026 hike, but there’s a lot more caution in today’s remarks than we expected, including mentions - twice - of possible downside risks to the OCR if global economic activity deteriorates abruptly.
“Something has spooked members of the committee, and we can’t be sure that our initial view - that this is just a pause until December - is as strong as might be assumed.”
‘A close-run thing’
ANZ chief economist Sharon Zollner said a 25 basis point hike in October would have been the most “prudent course” given the “higher outlook for near-term inflation, resilience in activity indicators, the turn higher in third quarter core inflation measures - and the fact that a hold would weaken the already soggy exchange rate meaningfully, as has indeed occurred.”
In the end, it was a “close-run thing”, Zollner said, as some committee members felt it was “more prudent” to watch how developments unfold over the next six weeks before taking action - with an eye on downside risks to global growth, in particular.
“We continue to believe that it will be necessary to lift the OCR to 3.5% in order to head off risks of inflation becoming persistent, and our base case is that the three hikes will come at the next three meetings, in December, February and March. Just like the RBNZ’s, our forecasts remain highly conditional on developments.”
Kiwibank economists applaud the pause
But Kiwibank economists Jarrod Kerr, Alexandra Turcu and Elliott Lowe have taken a different view, applauding the pause.
“They have delivered two hikes [in July and September], and want to look around. They are on a fact finding mission (data dependent). And their decision clearly lowers the highly inflated expected path for interest rates from here,” they said.
The Kiwibank economists had expected a hike at October's monetary policy meeting, but said they "remain firmly in the most dovish camp, expecting far fewer hikes compared to the consensus of economists looking for moves towards 4% and above".
“We expect [the RBNZ] will hike again in the future. A move to 3% and then 3.25% in 2027 is still on the cards.”
The Kiwibank economists said that market pricing of 4% needed to be unwound.
“That will lower wholesale rates, and lower the pressure on all retail rates, particularly mortgage rates. This is good news for Kiwi households and businesses. It’s precisely the ‘time to assess’ we have been fiercely arguing for.”
The December 9 meeting will be the last monetary policy meeting for 2026, and comes after the November 7 election. Depending on the election outcome, the RBNZ could potentially see some changes to its monetary policy mandate.
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