RBNZ seen holding steady as oil shock lifts inflation but weak growth argues for patience.
Summary:
- RBNZ expected to hold OCR at 2.25% amid oil-driven supply shock
- Inflation seen rising above 4% with upside risks depending on oil path
- Growth outlook deteriorating, with recovery pushed into 2027
- Central bank likely to look through initial inflation spike
- Spare capacity and weak demand seen limiting second-round effects
- Inflation expectations key to policy outlook and timing of hikes
- ASB sees hikes delayed, but risks skewed toward earlier tightening
The Reserve Bank of New Zealand is expected to leave the Official Cash Rate unchanged at 2.25% at its April 8 Monetary Policy Review, with ASB arguing the central bank will prioritise caution as it navigates an increasingly complex mix of inflation risks and weakening growth dynamics.
Policymakers face what ASB describes as an “unenviable” backdrop. The escalation in the Middle East has triggered a major global supply shock, pushing up fuel, transport and fertiliser costs while disrupting supply chains. For New Zealand, the impact is already being felt through higher fuel prices and rising cost pressures across the economy, with inflation now expected to exceed 4% by mid-year and potentially move higher depending on the path of oil prices.
At the same time, the domestic economy was already fragile before the shock. Growth disappointed late last year, and while a recovery had begun, it remained uneven. Core inflation has proven persistent despite soft demand conditions, and the labour market now shows clear signs of slack, with elevated unemployment and subdued wage growth. This combination leaves the RBNZ in a difficult position: inflation risks are skewed higher, but growth risks are skewed lower.
Against that backdrop, the RBNZ is expected to stick to its stated strategy of “looking through” the initial inflation spike and focusing on whether second-round effects emerge. The key policy question will be whether higher energy costs feed into wages and broader price-setting behaviour. ASB argues that current economic conditions—particularly spare capacity and weak demand—should help contain these second-round pressures, giving the Bank time to remain patient.
However, risks remain firmly tilted toward a more persistent inflation outcome. The duration of the oil shock will be critical. ASB’s base case assumes oil around USD 100/bbl, lifting inflation to around 4%, but a more prolonged or severe shock—such as oil sustaining elevated levels or rising toward USD 130—could push inflation closer to 5% and keep it elevated for longer.
Importantly, inflation expectations sit at the centre of the policy outlook. While short-term expectations may rise, the RBNZ is likely to focus on longer-term measures, which are expected to remain anchored near 2%. Maintaining that anchoring will be key to avoiding a more aggressive policy response.
For now, ASB expects the RBNZ to remain on hold through most of 2026, with only a gradual tightening cycle beginning later in the year and extending into 2027. However, the balance of risks points toward earlier and potentially more forceful hikes if inflation proves more persistent or expectations begin to drift.
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Earlier:
The expected hold from the Reserve Bank of New Zealand, combined with messaging that reinforces a willingness to look through the initial inflation spike, is likely to be interpreted as dovish relative to current market pricing. This could see New Zealand front-end yields ease further and rate hike expectations retrace, particularly if the Bank continues to push back on aggressive tightening bets. The NZD may face modest downside pressure as interest rate differentials shift, while equities could find some support from a less hawkish policy outlook. More broadly, the stance reinforces a global central bank trend of tolerating supply-driven inflation shocks while focusing on medium-term inflation expectations.
