RBNZ Expected to Hike 25bp, Data-Pivot on October

The Reserve Bank of New Zealand is expected to raise the official cash rate by 25 basis points to 2.75% at its September monetary policy statement, and the decision should be unanimous, according to a detailed preview from a New Zealand bank. The central bank will likely be equivocal about whether further hikes follow in October, adopting a data-dependent approach as the OCR approaches the neutral rate near 3% and a heavy calendar of releases lands over September and October.

Data since the May projections were finalised may imply a modest downward adjustment to the RBNZ's own OCR forecasts. Lower energy prices and falling inflation expectations push in that direction, the note said, though plenty of risks remain. Analysts tend to think the RBNZ's view will not shift much given the significant uncertainties.

Under a hawkish scenario, the RBNZ signals a firm resolve to continue raising rates in October and beyond, possibly flagged through a modest increase in the OCR forecasts from the terminal rate of 3.28%. If the central bank also raised its neutral OCR assumption, that would increase the probability of this path. Markets could then price hikes in both October and December, taking the OCR to 3.25% by year-end.

A more dovish scenario would see the MPC suggest that after 50bp of tightening it now has the luxury of time to assess the inflation outlook before raising further. Depending on the wording, that might call into question whether an increase would occur even in December. Both options carry low probability, roughly 10-15% each, the preview said.

The strategy to return the OCR to around 3% by year-end remains clear and uncontroversial. What is unclear is whether further increases will be required at every remaining meeting in 2026. The economic recovery remains fragile, the note argued, and care should be taken not to take the recovery for granted, especially while the labour market improvement remains embryonic. Core inflation is still too high, and the analysts remain sceptical that inflationary supply shocks will dissipate quickly or sustainably. Higher rates are likely needed through 2027 once the economy is operating sustainably above trend and the labour market recovers.

The Economic Backdrop

Gross domestic product rose 0.8% in the March quarter, slightly below the RBNZ's 1.0% forecast, although historical revisions mean the level of activity was a little firmer than expected. June quarter growth is also likely to track close to the RBNZ's flat forecast; the bank has pencilled in a 0.1% decline. The estimate for the starting-point output gap is unlikely to have changed materially from the May assumption of around -1.5%.

Labour market data have been mixed. The unemployment rate rose to 5.6% in the June quarter, above the RBNZ's 5.4% forecast. Employment growth was firmer than expected, though some of that strength likely reflected survey volatility. Wage growth was also a little firmer but non-threatening, the Labour Cost Index rose 0.7% quarter-on-quarter and 2.0% year-on-year. Updated estimates of net migration and population growth have come in lower than expected.

Survey indicators of business sentiment have swung around recently. Looking across the latest QSBO, ANZBO and PMI results, overall business confidence is back around the levels seen before the Middle East conflict began. Firms continue to report pressure on operating costs, and some hiring intentions gauges remain low. Consumer confidence has also rebounded, though it remains low by historical standards.

Housing market conditions have stayed soft. Sales have fallen 5% since May, the average days-to-sell remains elevated, and prices have edged down. The RBNZ had already assumed a modest price decline over 2026 and limited gains over 2027; significant changes to those assumptions appear unlikely.

Inflation and the Terms of Trade

Inflation indicators have been volatile, reflecting large swings in global oil prices. While oil has picked up again in recent weeks, it remains lower than assumed in the May MPS. Headline inflation was 4.1% in the year to June, slightly below the 4.2% rise in the May forecasts (but higher than the RBNZ's updated 3.9% forecast at the July OCR review). Core inflation measures stayed within the bank's target band in the June quarter, with little sign of widespread spillover from high oil into other areas. Non-tradables inflation eased to 3.4%, in line with expectations.

Surveys of households, businesses and professional forecasters all recorded declines in inflation expectations in the September quarter. In most cases, expectations are back to pre-oil-spike levels, encouraging news for the RBNZ given the risk that the recent rise in headline inflation and continued firmness in oil prices could have pushed them higher.

New Zealand's terms of trade are likely to be around 4% higher than the RBNZ expected through the latter part of the year, even with elevated oil prices. Commodity export prices have remained firm, and merchandise export volumes are on track to grow by more than 2% this year. Services exports, particularly tourism, have also strengthened and are expected to grow by around 8% this year.

Domestic financial conditions have mostly tightened since May. One- and two-year fixed mortgage rates have risen by around 35 basis points since May, compounding the increase seen since the start of the year. The easing in borrowing costs that households experienced as they rolled off earlier high mortgage rates has now come to an end. The NZ dollar trade-weighted index currently sits at 67.2, above the 66.6 level assumed in the May projections.

The decision is scheduled for release on the second Wednesday of September, with markets pricing a 25bp hike as a near certainty. The forex market analysis page will update with the immediate reaction.