Split decision keeps OCR at 2.25% for now

The key numbers...

The official cash rate (OCR) was held at 2.25% today by the narrowest of margins, with Reserve Bank Governor Dr Anna Breman using her casting vote to break a 3-3 split in the Committee. The Committee’s three external members all voted for a lift in the OCR to 2.5% at this meeting.

The Bank stated that “the OCR will most likely need to increase sooner and by more than envisaged in the February Monetary Policy Statement.” The Bank’s forecasts point towards the OCR reaching 3% by the end of this year.

All Committee members agreed that the OCR would need to increase at future meetings. Today’s disagreement was about the timing of the start of these increases, with members voting for a hold emphasising that data to date showed that core inflation, wage growth, and inflation expectations remain under control. Members in favour of an increase today noted that the OCR is currently stimulatory, and that moving now would help reduce medium-term inflationary risks.

The Bank’s forecasts see consumer price inflation peaking at 4.3%pa in the September 2026 quarter before returning to 2.0%pa by September 2027. The Bank’s statement continued to weigh up the relative effects of “persistent [higher] wage- and price-setting behaviour versus weaker economic activity on medium-term inflation pressures”, but these forecasts suggest the Bank still expects limited second-round inflationary effects from the fuel price spike.

The Bank’s economic growth forecasts for the year to March 2027 are a percentage point lower than in February, with year-end growth of just 1.7%pa predicted. Some catch-up is expected to begin by the second half of next year as oil prices return below US$90/bbl, with year-end growth accelerating to a peak of 3.6%pa by September 2028.

...and our reaction

Today’s decision was far closer to an increase in the OCR than we had anticipated. But we’re not mad about it – in fact, it’s closer to our own thinking too. The vote represents an intriguing split between the Reserve Bank’s internal view and the external perspective of appropriate monetary settings.

The wait-for-data approach being taken by internal Committee members has echoes of 2021 about it, when the Bank refused to believe stronger inflation could be a persistent problem until it had hard evidence of it, and monetary policy was left playing catch-up.

Given how close things were to a raise today, it would be very surprising if the OCR does not increase at the next review in July. With four more meetings before the end of 2026, the OCR could reach 3.25% by December if the Bank lifts interest rates at every remaining opportunity this year.

Put another way, it’s clear to everyone where interest rates will go – including the Reserve Bank. In our view, if you know where you’re heading, you might as well get going.

Perhaps the biggest debate now is about how much further tightening will be required during 2027. Although we recognise that weak demand conditions are limiting the ability of some firms to pass on higher costs, we still think the Bank is being overly optimistic about the speed with which inflation returns to the 2.0%pa mid-point of its target band. We expect more persistent price pressures will force the Bank to lift the OCR towards 4.0% during the first half of 2027.

The Bank’s estimate of the neutral OCR, where the economy is being neither stimulated nor constrained, currently sits at or just above 3.0%. That estimate implies that monetary policy will continue to stimulate the economy throughout the rest of this year, despite near-term inflation pressures.