Kiwibank Urges RBNZ to Pause Further Interest Rate Hikes

Kiwibank Urges Pause As Economic Recovery Hits Speed Bumps

Kiwibank says the Reserve Bank should leave interest rates stimulatory for now to encourage investment and hiring. The Reserve Bank previously lifted the official cash rate (OCR) from 2.25% to 2.50% in July, marking the first rate increase in three years. Kiwibank expects the OCR to rise again to 2.75% next Wednesday, moving toward 3% later this year. However, Kiwibank economists stated that if it were up to them, they would have left the cash rate at 2.25% and looked to commence tightening after the election.

The bank pointed to soft economic indicators, including unemployment at 5.4% and underutilisation at 13%, alongside annual wage growth of around 2% and weakness in the housing market, according to MPAMAG. Kiwibank highlights that economic activity could contract in the current quarter, with GDP expanding just 1.3% over 2025. Inflation has eased to 3.1% from its post-COVID peak of 7.3%, leading economists to argue there is little risk of inflation becoming embedded through wages.

Geopolitical Pressures and Slowing Demand

Uncertainty stemming from the war in the Middle East has caused businesses to delay or cancel projects while households pull back on spending, according to Kiwibank. MPAMAG notes that oil prices have whipsawed and uncertainty surrounding a possible diesel shortage has kept households and businesses on edge despite a fragile ceasefire.

Kiwibank economists argue that households and businesses do not need a rise in interest rates to dampen their demand because current conditions are not driven by excess demand like the post-COVID period. “It is simply too early to assess the inflationary pulse, and the likely unwind,” the Kiwibank economists said, as reported by 1News and noted by Indian Weekender. “It is too early to gauge the impact on demand. And it is too early to see the adverse effects in the labour market. Therefore, it is too early for the RBNZ to hike.”

Westpac Forecasts Deeper Tightening Through 2027

In contrast to Kiwibank’s cautious stance, Westpac anticipates that interest rate hikes will continue well beyond this year. Westpac also forecasts a 25-basis-point increase next week and another later this year, bringing the OCR to 3% by the end of 2026, according to 1News and Indian Weekender reporting.

However, Westpac expects the tightening cycle to extend into 2027, potentially pushing the OCR to 4% as the central bank works to bring persistent underlying inflation back to target. Westpac chief economist Kelly Eckhold said the economy appears to be regaining momentum after a challenging period, with growth forecast at 2% this year and 3% in 2027.

“However, core inflation has now sat above the 2% midpoint of the RBNZ’s target band for five years, and headline inflation is expected to stay above 3% until mid-2027 before briefly dipping below 2% as fuel effects drop out,” Eckhold said, as quoted by 1News. “The underlying pressure on prices has proven persistent, and the Reserve Bank will need to manage that carefully.”

Frequently Asked Questions

What is the current official cash rate in New Zealand?

The Reserve Bank lifted the official cash rate (OCR) from 2.25% to 2.50% in July, marking its first rate increase in three years.

Why does Kiwibank want the Reserve Bank to pause rate hikes?

Kiwibank points to rising unemployment at 5.4%, underutilisation at 13%, subdued wage growth around 2%, weakness in the housing market, and international uncertainties from the Middle East as reasons to keep monetary policy stimulatory.

What do other banks like Westpac predict for interest rates?

Westpac expects the OCR to reach 3% by the end of 2026 and potentially climb to 4% through 2027 to combat persistent underlying inflation.

What are your thoughts on the upcoming official cash rate decision? Join the discussion by dropping a comment below, and explore our finance section for more banking updates and economic analysis.