First Impressions: RBNZ Monetary Policy Review July 2026
The RBNZ unexpectedly raised the OCR to 2.5%. We review some key quotes side by side relative to the May meeting below and provide an initial take on the implications.
The RBNZ has unexpectedly increased the OCR to 2.5%. The decision was reached by consensus. It seems that the balance of the Committee remains similar: Gai, Gourley and Hansen remain hawks while Conway, Breman and Silk remain Doves. There is perhaps a modest shift in the bias of the group regarding the balance of risks for inflation as one hawk (Hansen) sees a balanced inflation outlook now.
The MPC are pointing toward follow on tightening and we still expect an OCR rise at the September Monetary Policy Statement. The MPC seemed concerned that not raising the OCR today would prompt further easing in financial conditions and hence it seems the RBNZ continues to see an end-of-year OCR of 2.75-3% as being reasonable.
A comparison of the RBNZ's updated policy assessment compared to their previous statement is shown in the table below. If the table does not display properly, please click the red 'Read more' button for the desktop version.
We will provide more detail after the press conference.
Media contact:
Kelly Eckhold, Chief Economist
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kelly.eckhold@westpac.co.nz
RBNZ comparison table July 2026 vs May 2026
| Category | May 2026 quotes | July 2026 quotes | ||
| The next policy decision | All Committee members agreed that increasing the OCR at upcoming meetings would likely be necessary to ensure higher near-term inflation does not feed through to higher medium-term inflation. | The Committee agreed that while further OCR increases appear likely at upcoming meetings, their timing is highly uncertain. | ||
| The pace of OCR increases will depend on the relative influence of persistent wage- and price-setting behaviour versus weaker economic activity on medium-term inflation pressures. | Future OCR decisions will depend on the Committee’s judgement about how price-setting behaviour and excess productive capacity affect medium-term inflation pressures. | |||
| The Committee remains focussed on bringing medium-term inflation back to target and expect that OCR increases will be required this year. | Increasing the OCR at this meeting is intended, in part, to avoid an unwarranted further easing in financial conditions. | |||
| The medium-term direction for the OCR | On balance, the OCR will most likely need to increase sooner and by more than envisaged in the February Monetary Policy Statement. | With inflation still above target and economic activity expected to strengthen, some further reduction in monetary stimulus is likely to be required to return inflation to the 2 percent target mid-point. | ||
| With inflation pressures increasing in coming months, these members agreed that OCR increases would be required to ensure inflation returns to target over the medium term. | The Committee agreed that it was appropriate to start reducing the degree of monetary stimulus to ensure that inflation returns to target over the medium term. | |||
| The neutral OCR | These members noted the wide range of estimates for the neutral interest rate, making it difficult to assess the extent to which current monetary conditions are accommodative. | The Committee assessed that the current level of the OCR remains accommodative. | ||
| However, members noted that there is some uncertainty around where to judge the current level of the neutral interest rate. | ||||
| Prasanna Gai noted that recent geoeconomic shocks may have increased New Zealand’s neutral interest rate by reducing global productive capacity and raising investment demand relative to available global savings. | ||||
| The strength of economic activity | Domestically, business contacts and surveys indicate weaker confidence and spending. | New Zealand’s economic recovery was underway before the Middle East conflict, but lost momentum in the June quarter as the oil shock weighed on economic activity. | ||
| Consumer confidence has fallen sharply, and the housing market remains weak. | Growth is expected to resume in the September quarter as these effects fade and confidence improves. | |||
| Near-term economic activity is likely to be weaker than assumed in the February Statement because of the Middle East conflict. | The Committee noted that domestic economic activity slowed in the June 2026 quarter. | |||
| These forecasts indicate a slower economic recovery in the near term, with the pace of economic growth increasing by the end of the year. | Domestic economic growth is projected to resume in the September 2026 quarter. | |||
| The global economic outlook | The global economic backdrop remains uncertain. | Global growth has been resilient to the effects of tariffs and conflict in the Middle East, largely because of strong AI-related investment and spending on defence and economic security. | ||
| On balance, New Zealand’s trading partners are expected to see weaker growth and higher inflation. | The Committee noted that global economic activity had remained robust through 2025 and into early 2026, despite significant headwinds. | |||
| The Middle East conflict poses downside risks to global economic activity. | Consensus forecasts imply that trade-weighted global inflation will moderate close to 2 percent in 2027. | |||
| The labour market | The labour market was stabilising, with employment growing modestly and annual wage inflation remaining at 2 percent in the March 2026 quarter. | Over the medium term, inflation returning to the 2 percent target mid-point will lift household purchasing power and help support a sustained recovery in growth and employment. | ||
| Unemployment remains elevated, indicative of spare capacity in the labour market. | Members noted that high inflation erodes households’ purchasing power and dampens domestic demand. | |||
| Wage pressures could also arise from labour shortages in some sectors and regions. | Inflation declining towards the target mid-point will help to ensure a sustainable recovery in economic growth and a stronger labour market. | |||
| The short-term inflation outlook | The ongoing conflict in the Middle East is weakening economic activity and increasing near-term inflation. | The forecast for near-term inflation has declined, given that current oil futures pricing is now significantly lower than assumed in the May Statement. | ||
| First round direct and indirect effects from higher petrochemical prices will increase inflation this year. | Despite progress towards conflict resolution in the Middle East and the recent fall in energy prices, annual consumers price inflation is expected to remain above the Monetary Policy Committee’s 1 to 3 percent target range in coming quarters. | |||
| Annual headline inflation is expected to increase to a peak of 4.3 percent by the September 2026 quarter and to return to the target mid-point in mid-2027. | Annual headline inflation is expected to have peaked at 3.9 percent in the June 2026 quarter, before declining to 3.3 percent in the September 2026 quarter. | |||
| The medium-term inflation outlook | Currently, core inflation, wage growth, and medium- to long-term inflation expectations remain consistent with inflation returning to the 2-percent target mid-point over the medium term. | Although energy prices have decreased, the effects of the shock will linger for some time and the outlook for medium-term inflation pressures remains uncertain. | ||
| The outlook for medium-term inflation pressures is also uncertain. | Spare capacity in the economy is expected to limit firms’ ability to pass on higher costs, meaning many businesses may need to absorb them in margins. However, some firms may look to rebuild margins as demand recovers. If sustained, a lower exchange rate could also add to medium-term inflation pressures | |||
| However, weak demand and elevated unemployment will dampen medium-term inflation pressures. | ||||
| The balance of risks for economic growth and inflation | The Committee judges that the balance of risks is to the upside for inflation and to the downside for growth. | The Committee judged that there are both risks to the upside and the downside. | ||
| Members noted that spare capacity in the domestic economy and weaker global demand could constrain firms’ ability to pass on higher costs by more than assumed in the central projection. | In the discussion, Prasanna Gai and Hayley Gourley assessed that risks were skewed to the upside, while Anna Breman, Paul Conway, Carl Hansen and Karen Silk viewed risks as broadly balanced. | |||
| Lower spending by households in response to lower real income growth, persistently elevated unemployment, a weak housing market, and reduced resilience due to repeated shocks collectively pose downside risks to domestic economic activity. | The Committee agreed that all these upside and downside risks are relevant for the medium-term inflation outlook and will be important for the monetary policy stance going forward. | |||
| Key arguments advanced by more hawkish MPC members | Three members (Carl Hansen, Hayley Gourley, Prasanna Gai) preferred to increase the OCR by 25 basis points, to 2.5 percent at this meeting. | Prasanna Gai noted that, despite the recent decline in energy prices, some indirect effects from earlier increases in energy-related input costs may also still flow through to consumer prices. | ||
| These members emphasised that, given the breadth of critical inputs that have been impacted by the conflict, first round indirect price increases could become more broad-based, feeding through to a greater risk of second round price increases. | Prasanna Gai also highlighted the risk that the Middle East shock could coordinate price-setting behaviour, licencing firms to pass on costs more readily than otherwise. | |||
| These members judged that removing stimulus now, while observing domestic economic developments, would help reduce medium-term inflation risks. | Carl Hansen noted that lower energy prices could support a stronger recovery in household and business demand. | |||
| Moving earlier was viewed as preferable, given upward pressure on neutral rates and that it may also limit the overall magnitude of the increase in the OCR and the negative impact on output. | ||||
| Key arguments advanced by more dovish MPC members | Three members (Anna Breman, Karen Silk, Paul Conway) judged that holding the OCR at 2.25 percent was appropriate at this meeting. | Anna Breman, Paul Conway, Carl Hansen and Karen Silk viewed risks as broadly balanced. | ||
| These members emphasised that core inflation and wage growth remain contained and medium- and long-term inflation expectations remain around 2 percent. | Anna Breman noted that if demand remains weak, firms may have less ability to pass higher costs on to consumers and intelligence from recent business engagements point to divergence in ability to pass on cost increases. | |||
| Indicators of economic activity have deteriorated, in some cases more quickly than anticipated. | Paul Conway noted uncertainty around how quickly the recovery will broaden beyond currently strong sectors and regions. | |||
| Spare capacity in the economy is likely to dampen second-round inflationary pressure. | Several members observed that household consumption and investment remain weak, reflecting caution and the lingering effects of repeated shocks. |
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