Our take on the latest Monetary policy review (Wed 18 Feb 2026)
Official cash rate (OCR)
First OCR rise now expected
Financial markets picking
2.25%
Dec-26 qtr
Sep or OctUnchanged
A quarter earlier than last MPS
For the first increase
The key numbers...
- The Reserve Bank maintained the official cash rate (OCR) at 2.25% at today’s review, as universally expected by markets and forecasters.
- The Bank’s published OCR forecast track now has the first OCR increase expected in the December 2026 quarter – an earlier move than the March 2027 quarter which was pencilled in from November’s Monetary Policy Statement.
- Market pricing shows a roughly 70% expectation of a hike to 2.50% in the September 2026 review, and a fully-priced in hike for the October 2026 review.
- The Bank noted that “risks to the outlook for inflation are balanced”, and that “the economic recovery remains nascent, and a premature normalisation of monetary conditions could dampen the recovery and lead inflation to undershoot the target. The Committee also considered the risk that policy remains accommodative for too long, leading inflation to persist above the mid-point of the target range for longer.”
- The Record of Meeting also notes that “if the economy evolves as expected, monetary policy is likely to remain accommodative for some time… As the recovery strengthens and inflation falls sustainably towards the target midpoint, monetary policy settings will gradually normalise” (our emphasis added).
- The Monetary Policy Committee continues to reinforce expectations that significant spare capacity in the economy should help to limit inflationary pressure over time, and that the wealth effect may limit household consumption growth, but also that “labour market conditions are likely to become more important relative to house prices in influencing consumption.”
...and our reaction
- The Reserve Bank appears less fazed about current inflationary pressures than we might have expected. Although the Bank has lifted its OCR track slightly, as expected, the framing of inflationary risks as balanced shows less urgency in needing to respond to current conditions that we might have expected.
- The view around inflationary risks being balanced, and concerns that a faster move to normalise the OCR could cause inflation to undershoot the target, is hard to square with current reality. There are some pressures already apparent in economic data – higher headline inflation, some increase in core measure, some increase in inflation expectations, and stronger than expected economic data.
- Yes, core inflationary pressures are contained for now, and there’s a lot riding on the Reserve Bank’s expectations that spare capacity in the economy will limit inflationary pressures, and that slower household spending growth might also limit how much prices can rise. Except that both of those trends currently exist, and inflationary pressures have still strengthened. We worry that, as we’ve seen in the past, the Bank may be at the early stages of ignoring real economic figures in front of us and relying on theoretical expectations to overcome present economic trends.
- At present, we remain of the view that the first increase in the OCR will occur in December 2026, but the risks of an earlier increase are growing. September would be the most likely earlier move, and May would be the earliest the Reserve Bank would have enough data to move interest rates up, but that is not our current view. We also begin to wonder if a normalisation to 3% will be enough – if the economy gets going even as inflationary pressures remain higher than expected, more stimulus might need to be withdrawn.
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