Reserve Bank tipped to hold fire on rate rise, in what may prove ‘poisonous’ decision
Monday, 25 May 2026
Bank economists are predicting the Reserve Bank will keep the Official Cash Rate on hold at 2.25% when it issues its monetary policy statement on Wednesday.
Westpac was not “ruling out” a rate rise, but ANZ senior economist Miles Workman noted on Friday that market traders were estimating only a 16% chance of a hike, based on the pricing of interest-rate swaps which indicate where they are putting their money.
That was down from about a 40% chance inferred from trading earlier in the month.
Workman said the earlier more hawkish sentiment might have been tempered by some more benign data on businesses’ inflation expectations.
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ASB economists Wesley Tanuvasa and Jane Turner said it was a case of “pick your poison” for the Reserve Bank, which is facing the twin threats of uncertain momentum in the economy and rising inflation.
Reserve Bank governor Anna Breman last month warned of the risk of “unnecessarily stifling the economic recovery” but also spoke of the bank’s willingness to “act decisively” to keep inflation at the 2% mid-point of its target band in the medium term.
Annual inflation was last recorded at 3.1% in the three months to the end of March and the Treasury has modelled scenarios in which it could rise much higher, depending on how events played out in the Middle East and the price of fuel.
BNZ research head Stephen Toplis said the important question for the Reserve Bank was whether the current inflation shock would “take on an air of permanence”, but that there was almost no way to answer that.
“We have six decision-makers, all of whom will be relatively perplexed about the future of the world, as are all the rest of us, charged with coming up with a consensus view,” he said, referring to the bank’s monetary policy committee.
“The only thing we can conclude with certainty is that the Reserve Bank will be accused of tightening too quickly or too much and then be blamed for clobbering the economy, or it will be charged with tightening too late and be at fault for any resulting inflation.”
The members of the monetary policy committee — which is composed of key Reserve Bank staff and independent experts — will need to make their call on interest rates under the shadow of the Budget, which will be released the following day, as well as under extra scrutiny.
Finance Minister Nicola Willis and the Reserve Bank agreed last month that, to improve transparency over its decision-making, the bank would reveal how different members of its committee voted on any occasions when they were unable to agree — which economists are tipping could be the case this time.
“We don’t have a strong view on what the best path for policy is, and it’s unlikely the committee does either,” ANZ chief economist Sharon Zollner said.
“It wouldn’t be surprising if the first hike required a vote”, she said, referring to what would be the first rate rise in the current interest-rate cycle.
“However, we don’t think they will be over the line already at this meeting.”
Economists are more or less united that, whether or not the Reserve Bank raises the OCR on Wednesday, hikes are in the pipeline.
ANZ and Westpac are forecasting three 25-basis-point rises later this year, which would take the OCR to 3% by December, while ASB is tipping four hikes, taking the rate to 3.25%.
Kiwibank chief economist Jarrod Kerr has very much broken with the pack, forecasting no increases in the OCR at all until early next year.
Workman said the Reserve Bank might weigh up information from pre-Budget announcements.
“The Reserve Bank typically runs the line that when they put their forecasts together, they always feed in the last published set of fiscal forecasts from the Treasury.
“That said, we do have ‘new information’ in the sense that the Government has announced a $300 million reduction in the operating allowance, but a $2.2 billion increase in capital spending for this year’s Budget.
“Those two things, netted out, mean that in the year to June 2027 there is a bit more fiscal stimulus overall.”
That extra stimulus equated to about 0.4% of GDP which could be expected to “add pressure” of about 10 to 15 basis points on the OCR, he said.
“Not enough to cause them to deliver a full hike, but there is just a bit more pressure than there otherwise would have been, because of that increase in ‘capex’.”
CORRECTION: An earlier version of this story incorrectly stated Wesley Tanuvasa and Jane Turner were Westpac economists. They work for ASB. Amended 9.46am, 25 May, 2026.