Odds of New Zealand Rate Hike to 3% Near 90% Ahead of October Review
Key Facts
Attention is turning to the Reserve Bank of New Zealand’s monetary policy review on October 28, with markets pricing in a nearly 90% chance of a 25-basis-point increase in the official cash rate to 3%. According to an InvestingLive brief, market expectations are nearing a peak rate of 3.5% by February 2027. ASB also expects a quarter-point increase in October, followed by two similar increases in December and February, taking expected tightening to 75 basis points and the rate to 3.5%. Westpac expects a hike to 3% at the October review and says the committee may formally vote on the decision because members continue to hold differing views. Investors are therefore focused on the rate path and guidance on December as much as on the increase they expect in October.
Annual inflation in the September quarter came in at 3.7%, below the central bank’s forecast of 3.9%, according to Westpac. But Westpac said underlying inflation measures remain elevated and are near or above the upper limit of the bank’s 1% to 3% target range. This divergence between slowing annual inflation and persistent underlying pressures puts the price reading at the center of the debate over the rate decision. It also makes the bank’s assessment of whether pressures are persisting, rather than a single quarterly reading, an important factor in the policy path it sets.
Westpac attributes some short-term inflation risks to a weaker exchange rate and higher energy prices. The bank said the trade-weighted exchange rate index is a little more than 3% below the level it had previously assumed for the December quarter, and that if this persists, it “will add some inflationary pressure over coming quarters.” It nevertheless pointed to weak domestic inflation in the September quarter and said there was still little evidence of second-round inflationary effects linked to the Iran conflict. This means energy and currency risks are factored into price estimates, while their subsequent effects remain under review. In this context, Westpac believes the central bank may leave the door open to another increase in December without committing to one in advance.
The October review comes ahead of New Zealand’s general election scheduled for November 7, 2026, a date announced by Prime Minister Christopher Luxon in January, according to the Associated Press. Ahead of the review, an InvestingLive brief said the New Zealand dollar’s reaction may depend more on the bank’s guidance for the path ahead than on its response to an expected increase to 3%. ASB’s forecasts put the next increase in December, followed by another in February, while Westpac expects rates to reach 3.5% in February before peaking at 4% in September 2027. These remain forecasts from financial institutions, while the bank’s decision will depend on the Monetary Policy Committee’s assessment. Traders are watching the October 28 review for signs of whether the bank will signal further tightening in December, just days before the election.