Reserve Bank divided but holds OCR at 2.25%, economists eye July hike
Wednesday, 27 May 2026
The Reserve Bank has voted by the narrowest of margins to leave the Official Cash Rate unchanged at 2.25% in its first monetary policy statement since the war in Iran.
The decision comes with inflation sitting just outside its target band, at 3.1% and amid uncertainty over the strength of momentum in the economy.
The three external members of the Reserve Bank’s monetary policy committee voted for a 25 basis point rise, with the three bank employees — including Reserve Bank governor Anna Breman — voting to keep the OCR on hold.
As chairperson of the monetary policy committee, Breman had the casting vote.
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Despite its decision to keep the OCR on hold for now, the bank’s monetary policy statement made clear that it expected multiple rate rises later this year and that it expected the OCR to reach 3% by early next year.
ASB chief economist Nick Tuffley said the new forecast implied “upwards of three 25 basis point increases over the remainder of the year” and pointed strongly to the first of those coming in July.
ANZ chief economist Sharon Zollner said it had an open mind on whether the OCR would need to rise above 3% in the current monetary cycle and there was “a lot of water to flow under that bridge”.
The Reserve Bank’s previous forecast, published in February — before the Middle East conflict and fuel shock — implied it would only raise the OCR once this year, in the final quarter.
The bank’s new forecasts see inflation rising to a peak of 4.3% in the three months to the end of September and official employment settling at 5.4% until the second half of next year.
The New Zealand dollar climbed a quarter of US cent to trade just under US58.7c in the immediate wake of the decision, indicating traders viewed the statement as more hawkish than they had expected.
The Reserve Bank said Breman, assistant governor Karen Silk and the bank’s chief economist, Paul Conway, felt keeping the OCR on hold was appropriate.
“These members emphasised that core inflation and wage growth remain contained and medium and long-term inflation expectations remain around 2%,” it said.
But the three independent members, economists Carl Hansen, Hayley Gourley and Prasanna Gai, voted for a 25 basis point rise.
“These members emphasised that, given the breadth of critical inputs that have been impacted by the [Iran] conflict, first round indirect price increases could become more broad-based, feeding through to a greater risk of second round price increases,” it said.
The bank described the medium-term outlook for inflation pressures as “uncertain”.
“These could remain elevated if households and businesses expect higher costs in future and build those expectations into price and wage-setting decisions today.”
But it said those pressures would be dampened by “weak demand and elevated unemployment”.
Despite their differences, all six members of the monetary policy committee agreed it would probably be necessary to increase the OCR at future meetings to ensure higher near-term inflation did not feed through to higher medium-term inflation, the record of their meeting stated.
BNZ research head Stephen Toplis said ahead of the meeting that the six members would be “relatively perplexed about the future of the world, as are all the rest of us”.
“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,” he said, ahead of the vote.
In the wake of vote, he said “the Reserve Bank wanted to keep rates on hold”.
“But the rest of the MPC didn’t. So the cash rate was left unchanged. But they all agreed that rates will need to rise, and rise soon.
“On this basis we bring forward our first rate hike to July with rate increases now pencilled in for every meeting until we reach the peak of 4%, that we have long been touting, in May 2027.”
Kiwibank had been an outlier on the near-term future direction of the OCR and hadn’t previously been expecting a rate rise before February next year. But it fell back into the fold in the wake of monetary policy statement, also tipping a rate rise in July.
Commenting on the way the monetary policy committee split, with the three bank employees voting one way and the external appointees the other, Breman said everyone had “an individual vote, and everyone has individual accountability for their votes”.
Although it did not happen on this occasion, Silk revealed it would not have been unprecedented for the bank-employed members of the committee to have voted in different ways.
The three external members were not able to outline their reasons for dissenting when Breman hosted a media conference today, but may do so later.
Breman said the bank’s new charter, confirmed early this month, encouraged external members to speak to the media, but that should be “coordinated with the Reserve Bank” and announced first on its website.