New Zealand flags gradual policy tightening after hiking rates

New Zealand's central bank, the Reserve Bank of New Zealand (RBNZ), raised its official cash rate by 25 basis points to 2.75% during a meeting on Wednesday, indicating further tightening measures ahead. The bank emphasized that any additional rate hikes would be gradual and measured, while warning of mounting risks to the economic outlook.

Governor Anna Breman stated that a future OCR increase is likely but emphasized the uncertainty in timing. The RBNZ highlighted potential threats to growth, such as weaker commodity prices, reduced export demand, and an uncertain global economy. The bank's cash rate projections indicate future rates of 2.81% in December and 3.15% by the end of 2027.

Markets had anticipated faster rate hikes, with the two-year swap rate decreasing by 5 basis points to 3.6775% and the New Zealand dollar slipping 1% to USD 0.5829. The increase still leaves the cash rate below its peak of 5.50% in August 2024.

The rate hike will impact the New Zealand government, which campaigned on economic revival and easing cost-of-living pressures. The opposition Labour Party warned of higher mortgage repayments for homeowners. Finance Minister Nicola Willis highlighted the RBNZ's assessment of a broadening economic recovery.

The central bank's next decision is due in October, before the general election, making it a potential campaign focal point. ANZ chief economist Sharon Zollner noted that the RBNZ may avoid setting the October hike, but the market reaction is understandable given the conditional tone of the outlook. Economists expect inflation to peak at 4.1% in June 2026, slightly lower than previous projections of 4.3%.

The economy is expected to expand by 0.5% in the final two quarters of 2026, compared to previous forecasts of 0.2% and 0.5% growth in the respective quarters.