Why policy is tightening now
Policymakers restarted rate increases in July as headline inflation pushed beyond the 1%-3% target band, signaling a shift away from highly stimulatory settings. In the second quarter, headline CPI accelerated to 4.1%, propelled by increases in oil, air travel, and other costs amid the conflict involving Iran. While growth has faltered under the weight of higher living expenses, expectations for a second-half rebound are adding to price pressures, reinforcing the drive toward a neutral policy rate near 3% or above.
Sharon Zollner, ANZ Bank's chief New Zealand economist in Auckland, said, "It makes sense for the RBNZ to continue along the path of getting the OCR back closer to neutral in the face of upside risks to inflation and a starting point north of the target band." "We expect the RBNZ to get on with the job at this meeting and the next one."
Market odds and economist views
Investor pricing aligns with the consensus view: swaps suggest a 95% likelihood of a quarter-point increase this week. After that, the picture is murkier. Markets put roughly a 70% chance on a follow-up move in October, and while forecasters are divided on such a quick repeat, most anticipate another rise no later than December.
Kelly Eckhold, Westpac's chief New Zealand economist in Auckland, said, "We see the RBNZ being equivocal about the potential for an October OCR increase." "The strategy to return the OCR to around 3% by year end seems clear and uncontroversial, but it's unclear that further increases will be required at every remaining meeting in 2026."
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Recent surveys indicate inflation expectations have eased, yet Eckhold cautioned that supply-side shocks may not fade fast enough. "Core inflation remains too high," he said. "It's likely that higher interest rates will be required through 2027 once the economy is sustainably operating above trend and the labor market is recovering."
The economic backdrop and risks ahead
Economists expect inflation to ease from here but to stay above 3% until the second quarter of next year. Domestically, high living costs, stagnant house prices and global uncertainty have weighed on activity, the jobless rate has climbed to an 11-year high of 5.6%, and output may have shrunk last quarter.
In July, the RBNZ projected growth would strengthen late this year and into 2027 on the back of exports and tourism, and it is expected to reaffirm that view this week. Economists broadly concur yet point to risks for confidence and consumption tied to persistent turmoil in the Middle East and New Zealand's November general election. In Auckland, ASB Bank senior economist Mark Smith said, "We are a little more circumspect on the outlook given the mixed run of data and the lack of obvious growth drivers." "We are hopeful that the economic recovery will broaden but are mindful of the risks of the economy remaining stuck in second gear."
