MNI RBNZ WATCH: Hikes Considered, But Not Certain

While the Reserve Bank of New Zealand's Monetary Policy Committee will consider raising the 2.25% official cash rate when it meets next Wednesday, the decision may be less certain than rates markets imply.

RBNZ-dated overnight index swaps suggest a 76% chance of a hike, but most economists and former central bank staff interviewed by MNI believe the probability is much lower, citing manageable core inflation, a weak economy, a sizeable output gap and a lack of solid economic data. 

A hike next week, following May's decision to hold rates alongside a fresh set of forecasts, would also complicate the Bank's communications after the MPC's last three-three split vote. (See MNI RBNZ WATCH: Gov Breman Says Hike Incoming After Hold Vote) The three external members voted for a hike largely due to oil price-related inflation concerns, which have eased over the past six weeks.

While most former staff agree with the MPC members that further rate increases will be needed, they expect the Bank to make a case for keeping the OCR unchanged until it can assess Q2 inflation data due on July 21, while retaining the tightening bias it communicated at the last meeting.

The Bank has held the OCR at 2.25% since its last 25 basis-point cut in November 2025.

DATA DEFICIT

Relatively little economic data has been released since the May meeting, and what has emerged has provided little evidence of stronger inflationary pressures or a tighter labour market. Lower oil prices are also likely to ease inflationary pressure.

Key releases, including the Quarterly Survey of Business Opinion and the June-quarter CPI, will both be published after next week's meeting, while Q2 labour market data is not due until August.

The Bank will also publish its household inflation expectations in August ahead of the Sept 2 meeting. 

Q1 GDP was the most significant release since the May meeting and printed broadly in line with the Bank's forecasts, growing 0.8% q/q. 

HIKE CASE

While the case for holding rates is strong, some argue the Bank should move more quickly toward its estimated 3% neutral rate to guard against further global uncertainty.

"When you look at core inflation, it's around 2.5% to 3%, you've got an economy that's turning, and productivity growth is awful," Cameron Bagrie told MNI last month. (See MNI: RBNZ Hike Uncertain As Recovery Gathers Pace) "You don't have the capacity to absorb much of a pickup in demand before you start running into capacity constraints."

Labour market conditions have improved slightly and New Zealand's limited supply-side capacity mean even moderate GDP growth would quickly absorb spare capacity, he argued.  "The phrase I'm using in New Zealand at the moment is that we're entering a period of 'broccoli and spinach'. Not everybody likes broccoli and spinach, but it tends to be good for you. Let's just get the OCR around neutral. That's a comfortable level to have it when you've got all this uncertainty."

Governor Anna Breman's comments during May's press conference that the OCR would likely need to rise at coming meetings have also been interpreted by markets as signalling a move in July, according to Justin Fabo, founder of Antipodean Macro. While Fabo sees a clearer case for hikes later in the year, he gives an increase next week a 40-60% chance.