OCR and Monetary Policy Review: What we got right, what we got wrong

Today in a consensus decision the Reserve Bank increased the OCR by 25bp to 2.50%. As discussed in our pre-announcement commentary, we were expecting more patience.

What we got wrong… the timing.

We thought the case for the three committee members who voted to hold in May had strengthened enough to buy another eight weeks to see how the data developed. The RBNZ opted to hike, a risk-management judgement, to keep prices anchored in an environment where the OCR sits meaningfully below neutral.

What we got right… the big picture.

Elsewhere the statement is remarkably close to our view:

Falling oil prices have eased near-term inflation pressures.
Growth was stronger than expected pre-Hormuz and will resume with lower oil prices and a stimulatory OCR level. Pre-Hormuz, our view and the RBNZ's was that the cash rate would need to increase.
Firms have been absorbing costs, Governor Conway noted in the press conference it had been "a challenging environment for firms to raise prices". However, the Bank is concerned firms may look to rebuild margins if demand recovers strongly. We agree with the risk but expect firms to be more cautious on the pace of pass-through given the demand backdrop.
Mortgage rates have increased, but rather than the year-to-date tightening, the RBNZ focused on the small pullback that followed the US–Iran MOU. A hike today helps arrest that reversal.

Other things on the RBNZ's mind:

The exchange rate has declined, which could lift import prices and add to inflation. A low OCR relative to peers is itself a driver of NZD weakness. As other central banks have hiked, the rate differential has widened against us.
The inflationary effects of the oil shock may linger.
Committee member Hayley Gourley flagged El Niño as a risk factor, raising the chance of extreme weather events and disruption to agricultural production.
The CPI has been above target for some time. An increase in the OCR today is a nod to remedying this situation.
Peak inflation is now behind us, the RBNZ sees CPI easing from 3.9% in Q2 back to the 2% mid-point by mid-2027.

In short, as we expected, the OCR will move toward neutral over time.

Yet the statement was not overly hawkish in this regard. In the RBNZ's own words, "while further OCR increases appear likely at upcoming meetings, their timing is highly uncertain". The Bank is taking a data-dependent approach, all future meetings are live, and the normalisation path will be determined by the interaction of price-setting behaviour and economic growth.

Disclaimer:
This information is of a general nature only and does not take into account your individual objectives, financial situation or needs. It should not be relied on as financial advice. Before making any investment decision, you should seek professional advice suited to your personal circumstances. Past returns are no indication of future performance.