The Reserve Bank of New Zealand faces a divided consensus ahead of its Official Cash Rate (OCR) decision at 2pm tomorrow. While ANZ and BNZ economists forecast a 0.25% hike to 2.50%, Kiwibank, ASB, and Westpac expect the bank to hold the current rate at 2.25% to support a lukewarm economy.
Will the Reserve Bank hike the OCR tomorrow?
Forecasters are split on whether the monetary policy committee will lift the benchmark rate or keep it steady. The decision is expected to be a “nail biter” due to the lack of consensus among major financial institutions.
ANZ chief economist Sharon Zollner expects a 0.25% hike, bringing the OCR to 2.50%. She argues that a 2.25% rate is too low to balance medium-term inflation risks. Even with falling oil prices, Zollner suggests it is “sensible to get a hike under the belt” as a form of risk management.
BNZ head of research Stephen Toplis shares this view, stating that interest rates need to reach a neutral level as soon as possible. According to Toplis, the bank should only consider pausing once neutrality is achieved.
Conversely, several major banks expect no change. Westpac chief economist Kelly Eckhold believes that falling oil prices and easing Middle East tensions have materially reduced inflation risks. Similarly, ASB and Kiwibank economists are forecasting a hold at 2.25%.
Comparison of Bank Forecasts
- ANZ: 2.50% (0.25% hike)
- BNZ: 2.50% (0.25% hike)
- Kiwibank: 2.25% (Hold)
- ASB: 2.25% (Hold)
- Westpac: 2.25% (Hold)
Why are economists divided on the interest rate?
The disagreement stems from how different experts interpret current economic data and inflation risks. Some see an “inflation crocodile” that needs to be addressed, while others see an economy that is already struggling.
ASB senior economist Mark Smith compared the current environment to “jumping at a crocodile in a dimly lit room,” a description previously used by former governor Adrian Orr. Smith suggests that governor Anna Breman may want to see more evidence of inflation “teeth” before acting. He notes that there is currently little clear information regarding inflation or economic activity.
Kiwibank chief economist Jarrod Kerr argues that the economy is “lukewarm at best” and certainly not “boiling.” Kerr’s team points to several factors supporting a hold:
- House Prices: National house prices declined by 0.2% in June, with Auckland seeing a sharper 4.3% drop.
- Consumer Confidence: Sentiment remains negative and sits well below historical averages.
- Economic Demand: The oil crisis in the second quarter caused demand destruction that amplified economic tepidness.
Kerr maintains that interest rates should be held to allow the economy to recover, stating there is “no need to jump at shadows.”
How will an OCR change affect New Zealand households?
The OCR is the central bank’s primary tool for managing inflation within its 1% to 3% target band. Because this rate influences the cost of borrowing, any move has immediate implications for personal finances.
A higher OCR generally leads to increased borrowing costs for businesses and households. This is intended to dampen spending and reduce inflationary pressure. For homeowners, this often translates to higher mortgage repayments.
Even if the Reserve Bank decides to hold the rate tomorrow, the long-term trend may still be upward. Mark Smith told consumers that regardless of tomorrow’s specific decision, “interest rates are likely to go higher this year.”
For savers, a higher OCR can be beneficial, as it typically leads to better returns on deposit accounts. However, for those with significant debt, the focus remains on the potential for further increases later this year or in September.
Frequently Asked Questions
What is the Official Cash Rate (OCR)?
The OCR is the benchmark interest rate set by the Reserve Bank. It influences the cost of borrowing and saving throughout the New Zealand economy.
When will the next OCR decision be announced?
The Reserve Bank will announce its decision at 2pm tomorrow, alongside a statement explaining the committee’s reasoning.
What is the Reserve Bank’s inflation target?
The central bank aims to keep inflation within a target band of 1% to 3%.
How do house prices affect interest rate decisions?
Falling house prices can signal a cooling economy, which may lead economists to argue for holding rates steady to prevent further economic contraction.
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