Westpac forecasts RBNZ to lift OCR to 2.75% with data-dependent stance

Westpac's primary forecast is for a predictable, consensus 25-basis-point rate increase accompanied by minimal fresh guidance, reducing the potential for a pronounced market response unless the RBNZ's October language diverges from the data-dependent approach the bank anticipates. The institution estimates only a 10 to 15 percent likelihood of either a hawkish surprise — such as an upgraded neutral rate assumption or a clearer signal toward consecutive hikes in October and December — or a dovish surprise that suggests a pause through December, making the risk around the base case roughly balanced rather than tilted. For the New Zealand dollar, the more significant market drivers are likely to be the forecast track itself and the fact that the NZD trade-weighted index is already trading above the RBNZ's own May assumption, which Westpac flags as a modest tightening in financial conditions the central bank might reference. Eckhold's personal view, that additional rate increases are likely needed through 2027 due to persistently elevated core inflation, places Westpac somewhat more hawkish than the passive, fully data-dependent communication the RBNZ itself is expected to deliver.

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Earlier:

• Preview - Path of least resistance: ASB expects consensus RBNZ hike this week
• Reserve Bank of New Zealand Shadow Board split, most back 25bp rate hike this week
• Preview: Inflation and growth strength point to further RBNZ tightening, BNZ says
• 90% of economists expect RBNZ hike on September 2, poll shows

Westpac expects the Reserve Bank of New Zealand to deliver a non-controversial increase to 2.75 percent, then keeping the October decision open without committing in either direction.

• Announcement due at 0200 GMT / 2200 US Eastern time

Summary:

• Westpac forecasts the RBNZ will lift the Official Cash Rate by 25 basis points to 2.75% at its 2 September Monetary Policy Statement, describing the decision as likely to be achieved by consensus.
• The bank expects the RBNZ's projections to indicate a 3% OCR by year end, unchanged from the May MPS, with the rate path beyond 2026 also staying similar to the May profile that suggested a peak near 3.3%.
• Westpac expects the RBNZ to be ambiguous on the likelihood of an October hike, adopting a data-dependent approach because the OCR will be close to the bank's often-cited 3% neutral rate and given the volume of data due before the October meeting.
• Westpac chief economist Kelly Eckhold sees only a 10 to 15% probability of a more hawkish scenario, where the RBNZ signals October and December hikes are both likely, bringing the OCR to 3.25% by year end, and a similar 10 to 15% probability of a more dovish scenario, where the RBNZ suggests it can take time to assess the inflation outlook before further increases.
• Since the May MPS, activity data have been broadly close to the RBNZ's forecasts, the labour market has remained soft with unemployment at 5.6% versus the RBNZ's 5.4% forecast, headline inflation came in at 4.1% for the year to June against a 4.2% forecast, and inflation expectations across households, businesses and forecasters have fallen back toward pre-oil-shock levels.
• Eckhold's own view is that the strategy of returning the OCR to around 3% by year end is not controversial, but that core inflation remaining too high means further hikes are likely required through 2027 once the recovery is more sustained, favouring a data-dependent approach from here.

Westpac predicts the Reserve Bank of New Zealand will increase the Official Cash Rate by 25 basis points to 2.75% at its Monetary Policy Statement on 2 September, characterising the move as a straightforward, consensus decision within the Monetary Policy Committee.

Chief economist Kelly Eckhold said the RBNZ's projections are likely to keep implying a 3% OCR by year end, consistent with the May MPS, with the rate track beyond 2026 also expected to remain near the May profile, which had the OCR peaking at around 3.3%. The key point of interest for the release will be how the RBNZ signals the likelihood of a further hike in October. Westpac expects the central bank to be unclear, favouring a data-dependent approach given the OCR will be close to the 3% neutral rate level the RBNZ frequently references, and given the large volume of data due for release across September and October.

Westpac sees only modest, roughly symmetric risks around that base case. A hawkish scenario, in which the RBNZ signals firm resolve to keep hiking in October and beyond, potentially through a higher neutral rate assumption or explicit guidance that an October increase is more likely than not, is assigned a probability of 10 to 15%; under that scenario, markets could conclude the OCR reaches 3.25% by year end via hikes in both October and December. A dovish scenario, in which the RBNZ suggests it can take time to assess the inflation outlook after 50 basis points of hikes, potentially raising doubts about a December move, is assigned a similar 10 to 15% probability.

Eckhold's own assessment is that the strategy of returning the OCR to around 3% by year end is clear and uncontroversial, though it remains unclear whether further increases will be needed at every remaining 2026 meeting given the fragile state of the recovery and the still embryonic improvement in the labour market. Nonetheless, he remains sceptical that inflationary supply shocks will dissipate quickly or sustainably, and expects that core inflation running too high will likely require further rate increases through 2027 once the economy is sustainably operating above trend and the labour market recovers, making a data-dependent approach the appropriate stance for now.

That view is set against a backdrop largely consistent with the RBNZ's own May forecasts. GDP and labour market data have come in close to expectations, with unemployment at 5.6% slightly above the RBNZ's 5.4% forecast, while headline inflation eased to 4.1% for the year to June against a 4.2% forecast, and inflation expectations across households, businesses and professional forecasters have declined back toward levels seen before the recent oil price spike. Domestic financial conditions have tightened somewhat since May, with one and two year fixed mortgage rates up around 35 basis points, and the New Zealand dollar trade weighted index running above the level assumed in the RBNZ's May projections, both factors that may feed into the central bank's updated assessment of financial conditions at the September meeting.