BNZ expects the Reserve Bank of New Zealand (RBNZ) to raise the Official Cash Rate by 25 basis points to 2.75% at its upcoming September Monetary Policy Statement, describing the move as effectively a done deal given markets are already pricing a 94% probability of a hike. With a quarter-point increase at the September 2 meeting essentially locked in, BNZ says the decision itself carries limited surprise potential, shifting the focus to how the RBNZ frames the policy path beyond it — particularly because the central bank will be trying to balance still-elevated inflation against signs of uneven demand in parts of the economy. BNZ believes the RBNZ will ultimately need to tighten further and faster than its own guidance currently suggests.

Further tightening expected beyond September

The RBNZ is expected to signal that further increases are likely until the cash rate reaches or exceeds neutral, with a published peak of roughly 3.5%. BNZ's own house view is more aggressive, with the cash rate ultimately rising 25 basis points at every meeting until it reaches 4.0% by May 2027. For markets, the key pricing question is whether the October and December meetings both carry live hike risk, with futures currently reflecting only one further move across those two meetings. BNZ also points to a growing gap between its own inflation forecasts and the RBNZ's projections, one that could force more aggressive guidance than markets currently expect.

Inflation seen above target until mid-2027

Central to BNZ's view is the RBNZ's July language that a further reduction in monetary stimulus was likely required to return inflation to target. BNZ forecasts annual CPI of 3.7% for the September quarter, well above the RBNZ's own July projection of 3.3%, and expects inflation to remain above the target band until mid-2027, with growth also tracking at least as strong as expected. Oil prices, while below their peak, have risen 12% since immediately before the RBNZ's July commentary, undercutting some of the disinflationary comfort the central bank had drawn on. That matters for the policy outlook because persistent price pressure tends to keep the discussion centered on whether current tightening is enough rather than on when easing might begin.

Risks tilt modestly to the downside

BNZ flagged risks in both directions, though it judges the downside risks somewhat more prominent. The downside case includes a potential El Niño-driven recession, election-related delays to the recovery, and a broader global asset price correction. On the upside, BNZ pointed to the possibility that structural inflationary pressures continue building regardless of central bank responses, alongside weaker output growth.

Labour market strength seen keeping RBNZ on course

On the labour market, BNZ said the only plausible reason for the RBNZ to pause would be higher unemployment, but with both employment and wage growth running a touch stronger than expected, it sees this as insufficient cause for hesitation. BNZ expects Friday's data to show a 0.4% lift in Q3 employment, an 11-quarter high, enough to halt the rise in the unemployment rate — meaning a softer unemployment reading is unlikely to deter the RBNZ. In other words, labour-market resilience is still one of the indicators likely to keep the central bank focused on inflation risks in the near term.

Retail sales slow on falling fuel volumes

Consumer spending offered a mixed picture in the second quarter. Q2 retail sales fell 0.5% quarter on quarter, slowing annual growth to 3.3%, weighed down by a 13.1% drop in fuel volumes. Core ex-auto sales still rose a solid 0.7%, and BNZ expects some bounce back in the September quarter as fuel costs retreat further.

Source: BNZ preview via ForexLive