OCR hike reduces monetary stimulus
The Reserve Bank raised its official cash rate (OCR) to 2.5% from 2.25%, describing the move as “a reduction in monetary stimulus.”
This decision was made on Wednesday, July 8th, 2026, and was reached by consensus, unlike the last decision in May.
Economists at major banks had been divided about what the RBNZ would decide, but the monetary policy committee (MPC) managed to reach its decision without needing a casting vote from governor Anna Breman.
The minutes of the meeting showed that external committee members Prasanna Gai and Hayley Gourley think the risks to inflation are skewed to the upside, while the third external member, Carl Hansen, sided with the three RBNZ members in assessing the risks “as broadly balanced.”
The central bank warned that “some further reduction in monetary stimulus is likely to be required to return inflation to the 2% target mid-point,” but said the timing of further hikes “is highly uncertain.”
The RBNZ now expects inflation will have peaked at 3.9% in the June quarter, lower than its previous 4.2% forecast, and that it will fall to 3.3% in the current quarter, largely reflecting smaller direct price effects due to lower oil prices.
It expects inflation to return to 2% by mid-2027, while noting that non-tradeable inflation – domestically-driven prices such as electricity and rates, “has been persistent despite spare capacity in the economy.”
Domestic economic activity slowed in the June quarter.
However, growth is expected to resume this quarter with lower fuel prices supporting a recovery in spending.
The committee also discussed the run-down of the about $55 billion large-scale asset programme (LSAP), agreeing to bring forward the final sale of $141 million of NZ government bonds to June 2027, a month earlier than scheduled.
The committee discussed the potential risk of “a correction in AI-related asset prices” as well as the impact of a re-escalation of Middle East tensions.
Assistant governor Karen Silk noted that the falling New Zealand dollar “could, if sustained, increase imported inflation,” while chief economist Paul Conway said that firms’ price-setting behaviour could prove more sensitive to further cost increases.
Silk said that slower than expected net immigration could weigh on rental inflation and house prices.
The New Zealand dollar spiked.
It went from 56.88 US cents immediately before the announcement to as high as 57.05 cents before retracing somewhat.
