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At their May 2026 decision, the RBNZ decided to hold rates steady at 2.25% in line with market expectations.

The bank delivered a hawkish upgrade to their OCR projections. The committee now sees the OCR at 2.8% by the end of 2026 (Prev 2.4%), and 3.07% by June 2027 (Prev 2.62%).

The bank noted that even though OCR increases are likely at upcoming meetings, the timing will largely depend on the incoming data.
 

• Vote Split
• The Cost of Taming Inflation
• Market Implications
• Incoming Data

One surprise outcome was the vote split among the committee, with 3 members voting for a hold, while 3 members voted for a 25-basis point hike.

Committee member Hansen argued that raising the OCR today would have created optionality for the bank to tighten again in July.

Governor Breman had the deciding vote and explained that she ultimately decided to vote for a hold based on her outlook for inflation in the medium-term.

However, despite the hold, the shift among the committee clearly shows that the balance of risks for inflation is skewed to the upside.

The challenge for the bank is that the increase in cost pressures, and now the expectation of higher interest rates, is expected to put downward pressure on growth and labour.

This was not comforting to hear about an economy that has already been struggling with sluggish growth for the past two years.

The committee now expects flat GDP in the June 2026 quarter (Prev 0.4%) but only a marginal drop in year-end GDP of 0.5% versus prior projections of 0.6%
 

For the labour market, the committee expects significantly higher Unemployment at 5.4% by year-end, versus 5.0% expected in the February MPS.

The overall message from the projections is that they will do what they have to in order to tame inflation, but it will come at a cost.
 

Following the decision and press conference, markets still price close to three hikes but now sees a >70% chance of a hike as soon as the July meeting.

As a result of the hawkish hold, the NZD strengthened across the board, with a close to 0.80% drop in the AUDNZD pair.

The pair initially saw some downside following slightly softer headline CPI out of Australia just ahead of the RBNZ decision.

Following the decision, the pair continued to push lower and currently trades around the 1.22 mark at the time of writing.

The pair is showing interesting internals with economic differentials grew larger in favour of the NZD over the AUD in recent week.
 

With the RBNZ turning more hawkish just as the RBA and Aussie data turns the other way, it could see a narrowing of the rate differentials that have kept the pair supported for the past few months.

Given today’s shift, the incoming data for both AU and NZ will be closely watched by FX markets to assess how the potential rate dynamics will shift the rate differentials.

Of course, the ongoing geopolitical situation means things can change in a heartbeat, so definitely worth bearing in mind.