The RBNZ delivers its second straight rate hike as sticky inflation and a recovering economy prompt policymakers to withdraw monetary stimulus, while warning that growth remains vulnerable.
New Zealand’s central bank raised its benchmark interest rate by 25 basis points to 2.75 per cent on Wednesday, signalling that further increases are likely as policymakers seek to bring inflation back to target while keeping the economic recovery on track.
The Reserve Bank of New Zealand (RBNZ) had been widely expected to raise its official cash rate by a quarter percentage point. Twenty-seven of 31 economists polled by Reuters had forecast the move.
The latest increase follows the RBNZ’s first rate hike in more than three years in July, marking a shift away from the aggressive monetary easing that followed a sharp slowdown in economic activity. The central bank said a gradual withdrawal of monetary stimulus was appropriate to return inflation to its 2 per cent target midpoint while supporting growth and employment.
RBNZ signals more rate hikes, but at a measured pace
While the RBNZ indicated that borrowing costs are likely to rise further, its projections suggest policymakers are not preparing for an aggressive tightening cycle. The central bank’s projected cash-rate path was little changed, with the official cash rate seen at 2.81 per cent in December and 3.15 per cent by the end of 2027.
The RBNZ said the latest increase would reduce the risk of having to raise rates by a larger amount later. “Future policy decisions will depend on the Committee’s judgement of the balance of risks to medium-term inflation,” the central bank said.
More from BusinessThe decision leaves New Zealand’s policy rate well below its recent peak of 5.50 per cent, reached in August 2024. The RBNZ subsequently cut rates sharply as economic growth weakened and inflationary pressures eased.
Inflation remains a key concern
Inflation continues to be the main reason behind the central bank’s renewed tightening cycle. The RBNZ’s latest forecasts show annual inflation peaking at 4.1 per cent in June 2026, slightly below its previous projection of 4.3 per cent for the September quarter.
Although inflation remains above the central bank’s 2 per cent midpoint target, policymakers appear increasingly confident that economic activity has regained some momentum.
“After lacklustre growth in the June quarter, New Zealand’s economic recovery has most likely resumed but remains uneven,” the RBNZ said.
The economy is now projected to expand by 0.5 per cent in each of the final two quarters of 2026. That compares with the previous forecast for growth of 0.2 per cent in the third quarter and 0.5 per cent in the fourth quarter.
Recovery faces external risks
New Zealand’s economic recovery gained momentum during the second half of 2025 but subsequently lost some traction amid the Middle East conflict and higher fuel prices during the first half of 2026.
More recent high-frequency indicators, however, suggest economic activity has rebounded in the third quarter. The RBNZ nonetheless continues to see significant downside risks to the economy, meaning the pace of future rate increases is likely to remain dependent on incoming inflation and growth data.
The central bank’s cautious approach also comes ahead of New Zealand’s general election in October. The next RBNZ policy decision is due less than 10 days before voters head to the polls, with the election race remaining closely contested. Economists expect the central bank to be mindful of avoiding any perception that monetary policy is influencing the political campaign.
Global central banks turn more hawkish
New Zealand’s rate decision comes amid a broader shift in global monetary policy. Central banks, including the US Federal Reserve, European Central Bank and Reserve Bank of Australia, have adopted firmer rhetoric as rising energy costs threaten to keep inflation elevated.
Financial markets have consequently increased bets that policymakers could keep interest rates higher for longer, even as concerns over economic growth persist.
For New Zealand, the challenge for the RBNZ is to contain persistent inflation without derailing a recovery that remains fragile. The latest 25-basis-point increase reflects that balancing act, with policymakers signalling that any further tightening is likely to be gradual rather than aggressive.
