New Zealand raises rates by 25 bps, flags further hikes to curb inflation pressures

[WELLINGTON] New Zealand’s central bank raised its benchmark official cash rate by 25 basis points to 2.5 per cent on Wednesday (Jul 8) and made clear that further rate hikes are necessary to return inflation to target despite a still-fragile economic recovery.

The decision was in line with 22 of 28 economists polled by Reuters, who had forecast the Reserve Bank of New Zealand would hike rates by a quarter point.

The central bank has slashed rates by 325 basis points since August 2024 to support an economy struggling to gain traction as inflation receded.

However, the oil shock tied to the Iran war is expected to have pushed inflation significantly beyond the central bank’s target range of 1 per cent to 3 per cent, forcing policymakers to bring forward rate hikes despite an unsteady recovery.

“With inflation still above target and economic activity expected to strengthen, some further reduction in monetary stimulus is likely to be required to return inflation to the 2 per cent target mid-point,” the RBNZ said in its accompanying Monetary Policy Review statement.

The kiwi dollar perked up 0.4 per cent to US$0.57, while two-year swap rates climbed 5 basis points to 3.3801 per cent. Markets are now almost fully pricing in another rate hike in October.

The central bank said that further cash rate decisions will depend on how incoming data, price-setting behaviour, and the strength of economic activity affect medium-term inflation pressures.

The statement said annual inflation is expected to have peaked at 3.9 per cent in the June 2026 quarter before declining to 3.3 per cent in the September quarter. It expects it to ease to close to 2 per cent in 2027.

In May, the RBNZ forecast that annual inflation was expected to peak at 4.3 per cent in the September quarter before returning to the 2 per cent target midpoint in mid-2027.

The lower forecast “largely reflects smaller direct price effects due to lower oil prices, as well as reduced pass-through to other consumer prices,” the statement said.

The minutes of the meeting noted that the Committee agreed that while further OCR increases appear likely at upcoming meetings, their timing was highly uncertain.

The South Pacific island’s economy returned to growth in the second half of 2025, but momentum appears to have been blunted by war in the Middle East and the resulting energy shock.

With oil prices now easing, policymakers expect some relief for households and businesses, supporting growth while helping to ease inflation.

New Zealand’s shift towards tighter policy mirrors a broader global trend, with major central banks including the European Central Bank and the Reserve Bank of Australia raising rates, while the Federal Reserve has adopted a more hawkish tone as policymakers move to contain inflation. REUTERS