Economists and market participants widely anticipate the Reserve Bank of New Zealand (RBNZ) will raise the Official Cash Rate (OCR) by 25 basis points to 2.75% at its monetary policy announcement on Wednesday, despite ongoing uncertainties about the strength of the country’s economic recovery and labour market conditions.
All major banks expect the RBNZ’s six-member Monetary Policy Committee to unanimously approve the increase, marking the second rate hike this year. The debt market has largely priced in the move, currently reflecting about a 95% probability of the rate adjustment.
The central bank is incrementally raising the OCR toward what it considers a neutral level—where monetary policy neither stimulates nor constrains economic activity—amid continued concerns over inflation and diminishing economic slack. The RBNZ’s last interest rate projection, released in May, indicated the OCR would remain around 3% through much of next year, potentially rising to 3.25%.
ANZ chief economist Sharon Zollner highlighted that market watchers will be scrutinizing the RBNZ’s forward guidance for signals on a possible third rate increase in October, which could push the OCR to 3%. She estimated the likelihood of an October hike at approximately 50%, warning that any firm indications from the central bank could trigger significant market reactions.
Stephen Toplis, head of research at BNZ, noted that the market currently prices in one additional rate rise after Wednesday’s expected increase. However, he pointed out that the timing—whether at the October review or the final meeting in December—is mainly of interest to financial traders. For the broader public, including mortgage holders, the key question remains where interest rates ultimately settle.
BNZ forecasts cumulative rate increases in the coming months leading to an OCR of 3.25% by year-end, with further tightening possibly pushing rates to 4% in 2027. Toplis cautioned that central banks typically reach their terminal rates faster than originally projected, as policymakers aim to avoid prematurely signaling moves that markets might price in too soon and thereby undermine policy effectiveness.
Recent economic indicators have presented a mixed picture. While some near-term inflation data have been encouraging, other information suggests the labour market may be tighter than the RBNZ’s assumptions. Data from Stats NZ showed a modest 0.3% increase in filled jobs in July, though this figure is expected to be revised downward. Consumer confidence, according to an ANZ survey, remains relatively flat.
Domestic political uncertainty and international developments add further complexity. A survey cited by ASB revealed a record proportion of investors expressing strong concerns about global geopolitical risks and local political instability. HSBC economist Paul Bloxham observed that September-quarter inflation could exceed the RBNZ’s forecast of 3.3%, driven by recent increases in fuel and agricultural prices. He noted the Reserve Bank’s continued focus on its inflation mandate amid cash rates believed to be below the neutral threshold.
Despite the tightening monetary stance, the labour market remains subdued. ASB economist Wesley Tanuvasa indicated that while the Middle East oil shock appears to have delayed New Zealand’s economic recovery, a significant reduction in labour market slack is unlikely until 2024.