The Reserve Bank of New Zealand (RBNZ) is expected to raise interest rates by 25 basis points on October 28, 2026, as inflation risks mount. In September, the RBNZ had raised rates to 2.75% but signaled a more cautious approach, projecting the next hike for December or early 2027. However, recent developments have shifted the outlook to a more hawkish stance.
Several factors are driving this change, including rising oil prices, a weaker New Zealand dollar, resilient economic growth, and higher front-end rates globally. Oil prices have surged around 20% since September, increasing the likelihood of inflation exceeding 4.0% in the fourth quarter. The trade-weighted value of the NZD has also dropped 4%, reaching its lowest point since 2009, which could further fuel imported inflation.
RBNZ Chief Economist Paul Conway and Governor Anna Breman have both hinted at the possibility of an October hike, despite softer third-quarter inflation data. Conway described the October meeting as 'wide open,' acknowledging market pricing and highlighting upside risks to inflation. Governor Breman reinforced concerns about higher fourth-quarter inflation, effectively neutralizing any dovish impact from the recent data release.
The RBNZ is expected to deliver a hawkish statement, keeping the door open for another hike in December or February. The terminal rate estimate has been adjusted to 3.25-3.5%. A hawkish move is also anticipated to support the NZD, which is currently undervalued in the short term. The proximity of New Zealand's general election on November 7 does not seem to be a significant factor in the RBNZ's decision-making process.