RBNZ Expected to Raise OCR to 3% to Combat Inflation and Weak NZ Dollar
Reserve Bank Expected to Raise Official Cash Rate to Three Percent at October Meeting
Financial markets and major bank economists anticipate the Reserve Bank of New Zealand will increase the Official Cash Rate to 3% on Wednesday, according to interest.co.nz. The upcoming Monetary Policy Review arrives just ahead of the November 7 general election and marks the second-to-last rate decision of the year for the central bank’s Monetary Policy Committee.
Surging Oil Prices and Currency Weakness Drive Policy Shift
The anticipated rate hike follows consecutive 25 basis point increases in July and September that brought the cash rate to 2.75%. Bank economists previously anticipated a pause following Anna Breman’s September remarks. Surging global energy costs and a softening New Zealand dollar reversed those expectations. Brent crude oil traded at US$112.50 a barrel on Friday, sitting near its early May peak, while the New Zealand dollar dropped below US60 cents.
BNZ head of research Stephen Toplis stated that the global economic environment differs significantly from RBNZ projections made in September. Refined oil prices tracked approximately 20% higher than the central bank anticipated, feeding directly into headline inflation and transportation expenses. Toplis also noted that the currency traded about 4% weaker than central bank assumptions, threatening the inflation target midpoint.
“The world is now in a very different place to what the RBNZ had anticipated and so it should adjust accordingly,” Toplis said.
Major Banks Forecast Further Tightening and Peak Rates
Statistics New Zealand reported that annual inflation reached 3.7% in the September quarter, remaining below the RBNZ forecast of 3.9% and June’s 4.1% reading. However, underlying pressures led some economists to project December quarter CPI inflation reaching 4.7%.
ANZ NZ chief economist Sharon Zollner agreed that currency and oil shifts demand a response at the October meeting. ASB senior economist Mark Smith reported that markets priced in a 25 basis point increase with approximately 90% probability, anticipating a peak cash rate of 3.50% by February. Westpac NZ chief economist Kelly Eckhold projected the rate could reach 4% by September 2027.
Election Outcomes May Restore the Central Bank Dual Mandate
Deliberations on Wednesday will also intersect with upcoming political shifts. Eckhold noted that the Monetary Policy Committee will consider potential outcomes of the November 7 general election, specifically regarding Labour Party and NZ First proposals to restore the central bank’s dual mandate. The Labour-NZ First administration originally introduced the employment mandate in 2018 under then-Finance Minister Grant Robertson before the current Coalition Government removed it in 2023.
The Monetary Policy Review takes place on October 28, without updated economic forecasts, before the country heads to the polls on November 7.