The Reserve Bank of New Zealand has signalled that it would defer another OCR hike until December, but economists at the four main banks and the financial markets expect that decision to be reversed next week. Markets put the odds of a 25 basis point rise to 3% on Wednesday at nearly 90%, with a 50% chance of a further rise in December.
The expectation runs against the central bank's own guidance. In September the RBNZ raised rates to 2.75% but pushed back against expectations of a large tightening cycle, and its projections pointed to the next hike only in December or the first quarter of 2027, with a 3.25% peak in 2028-2029. The Monetary Policy Committee agreed the increase to 2.75% on Wednesday 2 September.
BANKS LINE UP BEHIND AN OCTOBER RISE
ANZ, ASB, BNZ and Westpac all forecast an OCR increase at the 28 October meeting, after a lift in most core inflation measures. ANZ expects the monetary policy committee to conclude that the most prudent way to return the OCR to the 2% midpoint of its 1-3% range is a hike now.
ANZ chief economist Sharon Zöllner said that if the RBNZ does not hike, the NZ dollar is likely to come under more downward pressure from its already sharply lower starting point. Westpac expects headline inflation to reaccelerate back over 4% before the end of this year and to remain above the RBNZ's forecast for most of 2027. ING also expects a 25bp hike on 28 October.
Kiwibank is the dissenting voice among the economists cited. Alexandra Turcu and Elliott Lowe say the last thing the country needs now is an OCR hike.
INFLATION, OIL AND CURRENCY PRESSURES
Annual inflation eased to 3.7% in the September quarter from 4.1% in June. A sharp fourth-quarter increase in fuel, airfares, construction costs and the low New Zealand dollar is expected to push annual inflation to 4.5%. Non-tradable CPI, a measure of core inflation, came in at 3.3% against the RBNZ's 3.6% estimate.
Growth and global rates add to the case. Second-quarter GDP rose 2.6% year on year, against the RBNZ's 2.1% estimate. US two-year swap rates have risen around 35bp since the start of September, with New Zealand two-year swaps 33bp higher, while the Reserve Bank of Australia lifted its policy rate to 4.6% in September and kept the door open for more.
RBNZ OFFICIALS OPEN THE DOOR
Four of six committee members saw medium-term inflation risks as tilted to the upside at the last Monetary Policy Statement. That statement had signalled a December hike as more likely than one in October.
ELECTION TIMING AND MARKET PRICING
Pricing for October has been firm, with BNZ, Westpac and ASB research showing odds from around 80% to more than 85% for a 25-basis-point rise from the current 2.75%. ING does not see the proximity of the 7 November general election as a sufficient reason for the RBNZ to deliver a big dovish surprise by holding rates.