While economists are agreed there will be a hold, Westpac has taken the bull by the horns and is predicting six OCR hikes next year as the excess capacity in the economy evaporates.
In its first Economic Outlook for the year, Westpac chief economist Kelly Eckhold says the OCR will begin to rise late this year, with the pace of policy tightening increasing in 2027 to return interest rates to neutral levels more quickly.
He says the OCR will likely rise above neutral, which the bank estimates to be 3.75%, in late 2027. “The time taken this year to gain confidence about the recovery implies a need for slightly restrictive conditions over 2028.”
An OCR peak of 4.25% looks likely to remain in place over 2028 before returning to neutral in 2029, Eckhold says.
“The speed at which excess capacity is eroded will be critical in determining how long the RBNZ keeps the OCR at stimulatory levels.
“Should something such as election uncertainty or global events cause the economy to sag in mid-this year – as occurred in both 2024 and 2025 – then a delayed start to the tightening cycle will be likely, pushing the first move back into 2027.”
Eckhold says the first tightening could be brought forward to September – or possibly even July – if economic growth outperformed and the unemployment rate appeared to be dropping quickly.
If core inflation remained close to 3% mid this year, then the risk of earlier tightening will be significantly more likely, even if the recovery is proceeding more slowly than had been hoped.
Higher OCR track expected
ASB economist Wesley Tanuvasa says next week’s decision is expected to be a straightforward with the Monetary Policy Committee likely to show a unanimous vote amongst its six members.
However, ASB expects the Monetary Policy Statement (MPS) to show a higher OCR track than that at last year’s November meeting.
“While a 0.25% hike will likely be signalled by year end, the RBNZ will want to emphasise the conditionality of its policy path,” Tanuvasa says.
“It will be interesting to see how Governor Anna Breman characterises the data during her debut against the inflation dragon,” he says.
With headline inflation outside of the target band, the Tanuvasa expects the RBNZ will be stern in its messaging, although it will be able to cite enough disinflationary risks to justify waiting for more data.
“The muted housing market recovery, gradual domestic consumption growth, tempered migration and lower wage inflation mean there is evidence that disinflationary pressure remains, just less so than in November.”
Confidence to remove any further easing
BNZ research head Stephen Toplis says worrying signs that inflation is not as dead as the RBNZ expects will be the overarching conundrum the central bank faces into as it puts together its MPS.
The BNZ thinks the RBNZ will decide growth is stronger than anticipated but private consumption is weaker. There will also be question marks over potential growth but it will be too early to conclude that potential is much weaker than previously thought.
Toplis says the starting point for inflation is higher risking a rise in inflation expectations. “The economy’s evolution is such that the RBNZ can confidently remove the last vestiges of any prospective easing from its rate track.”
He says the central bank will want to strengthen the case for less stimulatory monetary policy while being mindful that it will not want financial markets to price any more tightening than is already the case.
This is likely to result in an on-hold interest rate decision on the day and a rate track that is only modestly more aggressive than in its November MPS.
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