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The Reserve Bank of New Zealand has left the official cash rate unchanged at 2.75 per cent, with its Monetary Policy Committee split 4–3. The OCR is the interest rate the central bank sets to steer inflation, and it flows through to the borrowing costs that businesses and households face.
The hold comes as annual consumer price index inflation eased to 3.7 per cent in the September quarter, down from 4.1 per cent in June and lower than expected. Even so, the committee signalled that the current setting is unlikely to last.
While the headline figure fell, the Reserve Bank said core inflation measures have climbed to around the top of its 1 to 3 per cent target band, and price increases have become more broad-based across the economy. Wage growth has been subdued to date, and medium-term inflation expectations have remained stable.
The committee is focused on returning inflation to the 2 per cent target mid-point over the medium term. It said it is discounting temporary disturbances to inflation and wants to avoid unnecessary economic instability.
The risk it is watching is persistence. “The longer inflation remains high, the greater the risk of higher costs feeding into inflation expectations and price- and wage-setting behaviour, making inflation more persistent,” the committee said.
Global events are adding to near-term inflation pressures in New Zealand. Fuel prices have risen further due to ongoing disruptions in global energy markets, and the exchange rate has fallen about 3 per cent since early September.
Annual inflation is expected to rise to 4.4 per cent in the December quarter, largely reflecting current fuel futures prices. The Reserve Bank cautioned that near-term forecasts are uncertain given volatility in oil and refined fuel prices
Those pressures sit outside the committee’s control, so it said it is looking past temporary disturbances rather than reacting to every move in fuel prices.
The New Zealand economy continues to recover, although conditions remain uneven. Export-exposed parts of the economy are benefiting from high commodity prices, strong demand for goods exports, and increased tourist numbers.
Domestic demand remains subdued outside of exporting centres. Early signs of a recovery in residential investment are emerging, including in Auckland.
The committee noted that New Zealand’s recovery could be stronger than expected, but could also lose momentum if the global environment deteriorates or export strength does not flow through to jobs, incomes, and household spending. Global growth has been resilient but is increasingly fragile given geopolitical tensions, high energy prices, financial stresses, and surging AI-related investment.
For businesses carrying debt, the hold keeps borrowing costs where they are for now, but the committee’s guidance points to tighter monetary policy ahead. “The Committee agreed that tighter monetary policy is likely to be required but remains conditional on the economic outlook,” it said.
Subdued growth in household spending is limiting some businesses’ ability to pass on higher costs and restore profit margins, the Reserve Bank said. That squeeze matters most for businesses selling to local customers rather than overseas ones, where demand and commodity prices are stronger.
All committee members agreed on the overall inflation outlook but differed on how much weight to give to various risks and on the timing of the monetary policy response.
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