The decision to hold the OCR at 2.25 percent has led experts to believe it will rise at its next review in July.
The official cash rate (OCR) was held at 2.25 percent by the narrowest of margins, with Reserve Bank Governor Dr Anna Breman using her casting vote to break a 3-3 split in the Committee. The Committee’s three external members all voted for a lift in the OCR to 2.5 percent at this meeting.
The Bank stated that “the OCR will most likely need to increase sooner and by more than envisaged in the February Monetary Policy Statement.” The Bank’s forecasts point towards the OCR reaching 3 percent by the end of this year.
All Committee members agreed that the OCR would need to increase at future meetings. Today’s disagreement was about the timing of the start of these increases, with members voting for a hold, emphasising that data to date showed that core inflation, wage growth, and inflation expectations remain under control. Members in favour of an increase today noted that the OCR is currently stimulatory, and that moving now would help reduce medium-term inflationary risks.
The Bank’s forecasts see consumer price inflation peaking at 4.3 percent pa in the September 2026 quarter before returning to 2.0 percent pa by September 2027. The Bank’s statement continued to weigh up the relative effects of “persistent [higher] wage- and price-setting behaviour versus weaker economic activity on medium-term inflation pressures”, but these forecasts suggest the Bank still expects limited second-round inflationary effects from the fuel price spike.
The Bank’s economic growth forecasts for the year to March 2027 are a percentage point lower than in February, with year-end growth of just 1.7 percent pa predicted. Some catch-up is expected to begin by the second half of next year as oil prices return below US$90/bbl, with year-end growth accelerating to a peak of 3.6 percent pa by September 2028.
Gareth Kiernan from Infometrics said this decision was far closer to an increase in the OCR than had been anticipated, but there was nothing to be mad about it. He said the vote represents an intriguing split between the Reserve Bank’s internal view and the external perspective of appropriate monetary settings.
“The wait-for-data approach being taken by internal Committee members has echoes of 2021 about it, when the Bank refused to believe stronger inflation could be a persistent problem until it had hard evidence of it, and monetary policy was left playing catch-up,” said Kiernan.
He said, given how close things were to a raise, it would be very surprising if the OCR does not increase at the next review in July. With four more meetings before the end of 2026, the OCR could reach 3.25 percent by December if the Bank lifts interest rates at every remaining opportunity this year.
“Put another way, it’s clear to everyone where interest rates will go, including the Reserve Bank. In our view, if you know where you’re heading, you might as well get going.”
He added that perhaps the biggest debate now is about how much further tightening will be required during 2027.
“Although we recognise that weak demand conditions are limiting the ability of some firms to pass on higher costs, we still think the Bank is being overly optimistic about the speed with which inflation returns to the 2.0 percent pa mid-point of its target band. We expect more persistent price pressures will force the Bank to lift the OCR towards 4.0 percent during the first half of 2027.”
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