Kiwibank now expects the RBNZ to begin hiking in July after a 3:3 split vote, warning the central bank risks overtightening into an economy still scarred by recession.
Summary:
- The RBNZ held the OCR at 2.25% on a 3:3 split vote, with external members pushing for hikes and internal members, including Governor, opting to hold via a casting double vote making it 4:3
- Kiwibank has brought forward its first hike call to July from February 2027, with wholesale markets pricing over 90% probability of a move; three hikes are priced by year-end to around 3.02%
- The RBNZ’s updated OCR track was lifted nearly 50 basis points over the next year, with the endpoint raised from 3.00% to 3.25%
- Kiwibank argues oil-driven inflation cannot be subdued by interest rates, with the key variable being when the Strait of Hormuz reopens rather than the level of the OCR
- New Zealand has not recovered from a deep double-dip recession in 2024-25, and Kiwibank warns hiking into a large output gap with demand already weak risks being too aggressive
- The government’s 2026 Budget delivered few surprises beyond a bank levy, with Treasury forecasting a return to surplus by 2028/29, though Kiwibank’s own forecasts are more subdued
New Zealand’s central bank left its cash rate unchanged at 2.25% last week but delivered a hawkish shock, with a three-all split on the Monetary Policy Committee and a sharply revised rate track that has brought forward market expectations of the first hike to as early as next month.
Analysts at Kiwibank, who had not expected the RBNZ to move until February 2027, now believe a July hike is more likely than not. The wholesale market agrees, pricing in a probability north of 90% for a move at the next meeting. Three hikes are fully priced by year-end, taking the OCR to around 3.02%, with markets anticipating a swift move above 3.5% through 2027. The RBNZ’s own updated track, lifted nearly 50 basis points over the coming year with an endpoint raised to 3.25%, offers little reason to fade that pricing.
The split vote laid bare the internal tension. External committee members pushed for immediate hikes, while internal members, including the Governor whose casting vote broke the deadlock, opted to hold. The hawks on the committee framed the decision around what the bank described as considerably higher cost pressures outweighing downside risks to growth, a judgement Kiwibank contests directly.
The bank’s core objection is structural. Oil price-driven inflation, the dominant force pushing prices higher in New Zealand as elsewhere, is not sensitive to interest rates. The real variable, in Kiwibank’s assessment, is when the Strait of Hormuz reopens and supply normalises. Raising borrowing costs into that environment adds another layer of cost to households and businesses already absorbing repeated shocks, without addressing the source of the inflation the RBNZ is targeting.
That concern carries weight given where the economy sits. New Zealand has not recovered from the double-dip recession of 2024-25, and 2026 was expected to be the year of repair before the war intervened. Kiwibank’s liaison with businesses points to subdued price-setting behaviour and demand destruction that is already deeper than the RBNZ’s models appear to reflect. Hiking with a large output gap, the bank argues, risks doing significant damage for limited gain.
The government’s Budget, delivered the day after the RBNZ decision, added little to the picture beyond a new bank levy. Treasury forecasts a return to surplus by 2028/29 and a stabilisation in the government debt trajectory, though Kiwibank’s own projections are considerably more cautious on the pace of recovery.
8 July the next meeting.
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Markets are already moving in anticipation, with wholesale rates pricing a better than 90% chance of a July hike and three increases fully priced by year-end to around 3.02%, up 77 basis points. The RBNZ’s revised OCR track to 3.25% gives those expectations room to run, and rates are likely to keep rising as hikes are delivered. The New Zealand dollar will remain sensitive to any shift in that pricing, particularly if incoming data shows demand destruction deepening faster than the RBNZ expects
