The RBNZ is expected to hold its OCR at 2.25% at today’s Monetary Policy Statement but deliver a hawkish forecast update, with the terminal rate seen rising to around 3.2% as Iran war energy costs threaten to push inflation above 4%.
Summary:
Source: Westpac Research RBNZ preview note
- The RBNZ is expected to hold the OCR at 2.25% at today’s Monetary Policy Statement, but the meeting is described as live with a vote among MPC members considered possible
- Headline inflation is forecast to move above 4% and remain elevated for much of 2026, driven primarily by surging refined fuel prices following the outbreak of the Iran war
- Growth forecasts are expected to be cut materially, with 2026 GDP now seen at 1.8-2.0% against the 2.8% projected in February; unemployment is expected to end the year in the mid-5% range
- The terminal OCR forecast is seen rising to around 3.2%, with the December 2026 projection moving to approximately 2.8%, implying two to three rate increases this year
- The central debate within the MPC is over timing rather than direction, with dovish members citing limited second-round inflation evidence and growth risks, while hawks point to rising inflation expectations and low real interest rates
- The author argues the OCR probably should not have been cut below 3% in the second half of 2025 and personally favours tightening at today’s meeting
The Reserve Bank of New Zealand is widely expected to leave its official cash rate unchanged at 2.25% when it publishes its Monetary Policy Statement later today, but Westpac analysts warn the meeting carries considerably more weight than a routine hold would imply, with a potentially divided committee and a significantly more hawkish set of forecasts both in prospect.
Westpac describes the RBNZ as effectively skewered between two forces pulling in opposite directions. The Iran war has driven a sharp rise in refined fuel prices that the bank expects to push headline inflation above 4% and keep it there for much of 2026, well above the RBNZ’s 1-3% target band. At the same time, the conflict has damaged household and business confidence, undermining spending and investment decisions and forcing a material reassessment of the growth outlook. Westpac now sees 2026 GDP expansion closer to 1.8-2.0%, against the 2.8% the RBNZ itself projected as recently as February, with unemployment expected to end the year in the mid-5% range rather than declining as previously anticipated.
That combination presents the MPC with a genuinely difficult calibration problem. Westpac sees the case for holding today as resting on limited hard evidence of second-round inflation effects, elevated uncertainty around the war’s duration, and the risk that premature tightening proves counterproductive if the growth slowdown deepens. The June quarter CPI is identified as the first meaningful test of whether inflation is broadening beyond energy costs.
The case for moving today is real, however. Westpac notes that real interest rates look low against rising inflation expectations, the New Zealand dollar has softened below earlier RBNZ assumptions, and global peers including Australia and Norway have already tightened. A prolonged hold risks inviting further currency weakness and a larger inflation problem down the track.
Westpac expects today’s updated OCR track to show a terminal rate around 3.2% and a December 2026 projection near 2.8%, implying two to three rate increases this year. Whether the decision requires a vote, and how close that vote appears, may prove as market-moving as the OCR outcome itself. The bank adds, notably, that with the benefit of hindsight the OCR probably should not have been cut below 3% in the second half of 2025, and that it would personally support a tightening at today’s meeting.
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The projected rise in the terminal OCR forecast to around 3.2% and a December 2026 projection of 2.8% would imply two to three rate increases this year, a material repricing from current market expectations. Whether the decision goes to a vote, and how close that vote appears, will be as significant as the headline OCR outcome in shaping near-term rate pricing.
A softer New Zealand dollar, running below earlier RBNZ assumptions, adds to the inflation risk and narrows the central bank’s room to remain patient
