MNI RBNZ WATCH: MPC Cites Risk Tolerance For Restrictive OCR
The RBNZ's higher-for-longer narrative is at odds with market expectations.
The Reserve Bank of New Zealand’s limited risk tolerance for further upward inflation surprises drove adjustments to its forecasts, which saw a 10-basis-point increase to its end-of-year Official Cash Rate assumption to 5.7%, Governor Adrian Orr told a press conference Wednesday.
“There is an asymmetric risk tolerance that we have because of where we're at and where inflation expectations are, we need to win the day,” he said, following the Monetary Policy Committee’s largely-anticipated decision to hold the OCR at 5.5% and publication of its May Monetary Policy Statement. (See MNI RBNZ WATCH: MPC To Hold, Maintain OCR Path Ahead)
He noted aggregate demand broadly matches supply and capacity, and potential output is lower than previously thought. “We are confident we will get [to the 1-3% target] because we know we are restrictive,” Orr noted. “We just don't want to be mucking around with how long it takes to get there because of price-setting behaviors.”
MARKET DISCONNECT
Markets seem at odds with the RBNZ’s view, with overnight index swaps pricing in a 5.16% OCR by the end of the year and an 85.5% chance of a rate cut at the Nov 27 meeting.
Orr pushed back against assertions the revised OCR track implied an 80% chance the RBNZ could hike again. “We're saying the OCR peaks around 5.7% or thereabouts and it's likely to remain in a restrictive level for some time yet,” he told reporters.
“Commercial Bank economists will provide information, actual market pricing provides information, but we are the ones who are responsible for delivering low and stable inflation,” Orr said, pointing to the disconnect between market expectations and the RBNZ’s forecasts. “The good news is we get to do it every six weeks and continue to learn as we move, just as many of the commentators have.”
The RBNZ last hiked the OCR 25bp in May 2023.
RENEWED FORECASTS
The RBNZ also upped its end-of-year CPI prediction 40bp to 2.9% within the MPS. However, its longer-term inflation predictions were only slightly changed from its February forecasts, with CPI reaching 2% by June 2026, compared to December 2025, and the first cuts expected in September 2025, versus June the same year.
Orr noted the slight changes to the CPI forecasts were driven by the adjusted OCR path and other variables in the model to ensure the RBNZ achieved its remit.
CPI’s higher starting point also drove the later cut predictions, he added.
“We anticipated nontradables inflation would be at 5.3% by Q1 this year, it's at 5.8% – it's a significant different starting point for inflation, with more work to do on that part which is harder to budge,” he added, noting the model suggested the OCR needed to stay restrictive for longer. “I deliberately use that word in a modelling sense because when we're back next time, the world changes again, and the inputs change again, and who knows where it goes."
The RBNZ next meets July 10.