Official cash rate on hold despite its 4.2% inflation forecast

Wednesday, 8 April 2026

The Reserve Bank has kept the official cash rate on hold at 2.25% following a review of monetary policy that Finance Minister Nicola Willis pointed out could already be dated by rapidly moving developments in the Middle East.

The central bank said it expected annual inflation to come in at 3% in the March quarter and rise to 4.2% in the June quarter.

But it said there were significant uncertainties around its forecasts and its decision to keep the OCR on hold “balances the potential benefits of responding pre-emptively to the risk of higher medium-term inflation against the cost of unnecessarily stifling the economic recovery”.

“The committee is vigilant to any generalised inflationary pressure and stands ready to act to return inflation to its medium-term target,” it said.

Read more:

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“If medium-term inflation expectations increase, then inflation is likely to become more persistent. However, weak demand and spare productive capacity in the economy should constrain the degree to which higher costs can be passed on,” it also said.

The New Zealand dollar, which had gained about half a US cent earlier in the day following US President Donald Trump’s announcement of a ceasefire with Iran, was little changed after the monetary policy review, trading at about US58c — suggesting markets saw the bank’s comments as neither particularly dovish nor hawkish.

The bank’s statement made no direct reference to the Iran ceasefire announcement.

Finance Minister Nicola Willis said it was “notable that some of the information that the monetary policy committee had to base its judgments on is already out of date, such is the fast-moving nature of geopolitical events”.

The bank made no fresh forecasts for inflation beyond the June quarter. Slides that the bank published alongside the record of its meeting made clear that it expected “core inflation” to continue to fall up until then, despite the predicted rise in headline inflation caused by the oil shock.

It also said it expected economic growth to weaken in the short term.

Commenting on the outcome of the review at a media conference, Reserve Bank governor Anna Breman said the fall in oil prices on Wednesday meant the prediction of 4.2% annual inflation in the June quarter might be “on the higher side”.

“But we’re also seeing a lot of volatility in oil prices and, if something happens, we could see oil prices staying above US$100 and then, unfortunately, there is also upside risk to that forecast,” she said.

The outcome of the review was published a few hours after Iran and the United States agreed to a conditional ceasefire and the safe passage of ships through the Strait of Hormuz.

The next scheduled opportunity for the bank to review the key interest rate will be on May 27, the eve of the Budget.

Many economists have been expecting inflation to rise significantly and stay above the 3% top end of the Reserve Bank’s target band this year, as a result of fallout from the Middle East conflict.

While this is expected to add to pressure for rate rises in the year ahead, Breman said in a speech late last month that the bank should avoid reacting too early to near-term inflation pressures that “monetary policy can do little about”.

ANZ chief economist Sharon Zollner said “downside growth risks” got plenty of airtime from the central bank but parts of the statement — which included a warning it was willing to act decisively to keep inflation at the 2% mid-point of its target band in the medium term — had a stern tone, which the market read as hawkish.

“The outlook for the OCR remains very uncertain, but the risks look tilted towards the Reserve Bank deciding policy normalisation should start earlier than our forecast of December,” she said.

Capital Economics economist Marcel Thieliant said that while the bank discussed a pre-emptive rate hike at Wednesday’s meeting, its committee signalled that the drag on economic activity from higher energy prices would keep spare capacity elevated for longer.

“Accordingly, we still believe that the bank will start to tighten policy later than the financial markets are anticipating,” he said.