RBNZ Signals Flexibility Amid Inflation Pressures

Reserve Bank of New Zealand Chief Economist Paul Conway said Thursday that the central bank’s late-October rate decision remains open despite mounting price pressures. Speaking at IMF and World Bank meetings in Bangkok, he stressed that policymakers want flexibility to either hold the Official Cash Rate or raise it by 25bps. While a hike is still seen as the most likely outcome, its timing is uncertain. Conway noted oil price gains and a weaker New Zealand dollar have added near-term inflation pressure, complicating the outlook. Still, the board expects inflation to ease back into its 1–3% target next year. With risks skewed to higher near-term inflation, officials are keeping both options open, with the scale and timing of any tightening dependent on incoming data.

The Reserve Bank of New Zealand raised its cash rate by 25 bps to 2.75%, delivering a second straight hike after an increase in July and in line with expectations. The decision reflects the need to gradually remove monetary stimulus and bring inflation back to the 2% target midpoint while supporting growth and employment. Annual inflation rose to 4.1% in Q2 2026, largely due to higher fuel prices stemming from the Middle East conflict. However, core inflation, wage growth and inflation expectations remain consistent with inflation returning to the 1-3% target band by mid-2027. The economy has likely resumed its recovery after lacklustre growth in Q2, supported by resilient external demand, export prices and investment in export-oriented sectors. Still, weak income growth, job insecurity and flat house prices weigh on household spending and residential investment. The Committee expects the recovery to strengthen and broaden but remains alert to risks of more persistent inflation.

The Reserve Bank of New Zealand raised its cash rate by 25 bps to 2.50% at its July meeting, the first hike in three years and in line with expectations, as policymakers aimed to return inflation to the 2% target, while avoiding economic disruption. The central bank said the partial reopening of the Strait of Hormuz has lowered global oil, gas and petrochemical prices, easing near-term inflation pressures. Headline inflation is expected to decline from a peak of 3.9% in Q2 2026 to around 2% over the next 12 months. However, the Committee warned that the effects of the energy shock could persist, with medium-term risks tied to firms’ pricing behaviour, margin rebuilding and a weaker exchange rate. The economy lost momentum in the June quarter as higher energy costs weighed on activity, but growth is expected to recover in the September quarter as fuel prices ease and confidence improves. Policymakers noted that further increases remain possible, with the pace dependent on incoming data.