Shifting sands under Reserve Bank ahead of next OCR decision
Monday, 29 June 2026
A growing number of economists are wavering in their belief that the Reserve Bank will raise the Official Cash Rate at its next review on Wednesday next week.
But many expect it may be a close call, and BNZ has formally tipped a rate rise.
The see-sawing developments in the Middle East have triggered the growing uncertainty.
The average price of 91-octane petrol dropped below $3 a litre today, according to price monitoring site Gaspy, and Westpac said it believed the central bank would scale back expected OCR hikes as energy prices recede.
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ASB on Friday cancelled its forecast that the bank would raise the OCR by 25 basis points at next week’s meeting.
But senior economist Mark Smith said the outlook remained “highly conditional on very uncertain global and domestic events”.
Salt Funds Management economist Bevan Graham also believed the Reserve Bank would wait longer before raising the key interest rate from its current level of 2.25%.
Financial markets were on Friday pricing in only a 64% chance of a 25basis-point rise, he said.
Late last month, a hike of that size had essentially been built into traders’ market positions.
The expectation that the Reserve Bank would raise the OCR to prevent higher fuel prices becoming embedded in inflation expectations has weakened.
But that has been partly offset by a feeling it may still do so to reflect the shift of the economic cycle towards a recovery.
Stats NZ today reported a reasonably strong 0.3% increase in filled jobs in May, with 7678 more jobs than in April on a seasonally adjusted basis.
Westpac has upgraded its forecast for economic growth this year from a pedestrian 1.5% to a more respectable 2%.
BNZ released its OCR forecast on today and is sticking by its prediction the Reserve Bank will raise the rate to 2.5%.
“Our view is you’d be hard stretched to suggest the inflationary pressure that was caused by oil price movements in the economy has completely dissipated,” its research head Stephen Toplis said.
“We’re still paying a lot more than we were at the pump. Diesel is still a lot more expensive than it was, and the second-round effects of those price movements I don’t think have been fully passed on, so it’s a bit premature to say ‘all is said and done’.”
If easing fuel prices did result in “a big sigh of relief amongst consumers and businesses” and they responded by spending more, that would become inflationary, he said.
“But the most important thing underlying all of this is that interest rates are miles below ‘neutral’,” meaning monetary policy was still stimulating the economy.
“Our view is that the Reserve Bank still needs to take the foot off the accelerator.”
Not doing so would also risk a further decline in the value of the New Zealand dollar which is trading at less than US$0.57 and A$0.82, which would also be inflationary, Toplis said.
“It just strikes me that it would be a real credibility issue here for the central bank to back off and provide extra stimulus to the economy at a time when there’s still an inflationary threat.”
But Graham said many of the same considerations that dissuaded three of the six members of the Reserve Bank’s monetary policy committee — including governor Anna Breman — from approving a rate rise in May still applied.
Whatever next week’s decision, the OCR was ultimately going higher, he said. “It’s just a matter of for what reason and when.”