In a nutshell:
- The Reserve Bank delivered its second consecutive Official Cash Rate increase on 2 September—from 2.50% up to 2.75%.
- While inflation looks to be coming under control, it's still concerned about the potential for it to become embedded as growth starts to pick up more broadly. It's balancing that with the fact that there's still plenty of excess capacity in the economy, and (outside of agriculture and exports) the recovery is still patchy.
- The path ahead looks to be slow and measured. At this stage, the RBNZ has signalled one further 0.25% increase to come later this year—likely in December—to bring us back to 3.00%. There may be another in late 2027, although that will depend on how the economic and inflation data play out from here.
- Fixed mortgage rates are expected to remain stable off the back of this week's announcement—with wholesale rates having climbed pre-emptively in recent weeks, the change is already largely baked into the rates available in market.
The Reserve Bank (RBNZ) delivered its second consecutive 0.25% Official Cash Rate (OCR) increase on 2 September—taking us from 2.50% to 2.75%.
It was unlikely things would go any other way this week. The market’s been pricing increases in for months now, and where the market goes, the RBNZ frequently follows.
As far as things go, it was a pretty clean-cut affair, with all six members of the Monetary Policy Committee voting in favour of the increase.
The tone of the RBNZ’s commentary was pretty balanced, with a ‘watch and wait’ approach evident.
While inflation is tracking in the right direction, it remains concerned about the possibility for it to get embedded as our economic recovery (and demand) picks up. On the flip side, there’s still plenty of spare capacity in the economy, particularly in the labour market, and (outside of agriculture and exports) the recovery's still patchy.
One more increase in the OCR (to 3.00%) seems likely this year—transitioning us out of a stimulatory and into a neutral rate environment. Beyond that, any further moves will be dependent on how the inflation and economic data evolve.
What the rationale behind this week’s OCR decision?
Well, the data's still a mixed bag—some good news, some not-so-good. But overall, the economy’s tracking in the right direction.
Businesses confidence has improved over the last couple of months—up in July and holding steady through August. Consumers, though, are a bit less upbeat. We’re not feeling quite as cautious as we were back in April, but the numbers are still in negative territory. Households are keeping their wallets shut for now— preferring to direct any extra cash towards savings instead—and it’s likely to stay that way until job security and house prices have stabilised.
Our latest unemployment numbers came in higher than expected, at 5.6% for the June 2026 quarter (up 0.2% on the March quarter). The participation rate rose too, from 70.4% to 70.7%, meaning more people are out there looking for work, but the jobs just aren’t quite out there yet.
Over in the housing market, things have cooled again in recent weeks. North Island house prices are still mildly falling (nothing new there), and real estate industry surveys show expectations firmly in the "prices are falling" camp. We've probably got another month or two of that ahead of us.
Finally, though, some good news on the inflation front.
Annual inflation figures for the June 2026 quarter—while up from 3.1% in March—came in slightly below the RBNZ’s expectations. Most of that 4.1% is down to the impact of the oil crisis. Drop fuel costs out of the equation, and annual CPI inflation was at 2.9%.
Meanwhile Stats NZ’s selected price indices for July shows annual food inflation down at 1.9%, and rents falling slightly as well. Domestic airfares were the main thing holding inflation up, as demand surged around the school holidays.
The RBNZ's latest Survey of Expectations (released mid-August) shows forecasters predicting annual inflation to be down at 2.60% in a year’s time—a big drop from last quarter’s expectations (3.41%)—helped by the fact that the impact of the global oil shock should fall out of the equation in March / April.
In other words, experts are now fairly confident that inflation will be comfortably within the RBNZ’s target 1-3% range by the middle (ish) of next year.
What’s the outlook on the OCR from here?
The RBNZ made one thing clear this week: the path its targeting will be slow and measured. We’re not in for a repeat of last cycle, when rates climbed from 2.00% to 5.50% in less than a year and brought everything to a grinding halt.
It’s given the brakes a couple of gentle taps, and there will be a couple more to come—but just enough to keep inflation in check, while still supporting economic growth and employment.
At this stage, the RBNZ’s updated interest rate forecast has one more 0.25% increase in the pipeline before the end of 2026, likely in December.
(October's probably a no go. It's a bit too close to election day for comfort, and the RBNZ won't want to trigger any more uncertainty as we head to the polls. That approach also buys the RBNZ time to just sit back for a bit and see how the inflation data plays out, before making any further moves.
Opinions have been mixed as to exactly where the OCR might end up. Prior to this week's decision, wholesale markets had been pricing in three further increases over the next 12 months—up to 3.50%. In light of the RBNZ's commentary, those wholesale rates may come down slightly over the coming weeks.
What does this week’s OCR news mean for interest rates and mortgage borrowers?
This week’s OCR decision shouldn’t move the needle on fixed mortgage rates—because the job’s already done. With wholesale rates having crept up pre-emptively over the last few months, this latest increase is already comfortably baked into mortgage rates in market.
Fixed rates are expected to remain relatively stable in the near-term, unless something happens to change wholesale market expectations of where the OCR will end up. If it looks likely the RBNZ could hit pause at 3.00%, mortgage rates should ease back slightly.
The advice to borrowers hasn’t changed: in a shifting rate environment, it’s always a good idea to talk to an adviser for guidance on the best approach for your circumstances and risk appetite, rather than betting everything on where you think rates are headed next.
About the author: David Cunningham, Chief Squirrel
With more than three decades of senior experience across New Zealand’s financial services sector, David knows the world of banking and finance inside out. He's not afraid to call it like he sees it (all part of our fight for a fairer financial system) which is why he's a regular media commentator on matters relating to the economy, housing market, mortgages, saving and investing, and interest rates.