UOB’s Lee Sue Ann and Jester Koh note that the Reserve Bank of New Zealand raised the Official Cash Rate to 2.50% in July and adopted a more hawkish tone as inflation risks remain elevated. They keep their OCR forecast at 2.50% through 2Q27, but highlight that risks are skewed towards further tightening if inflation pressures prove more persistent or external shocks re-emerge.

RBNZ hike keeps tightening bias alive

"The Bank noted that headline inflation remains above target, economic activity is expected to strengthen after a temporary loss of momentum in the June quarter, and some further removal of monetary stimulus will likely be required to return inflation sustainably to the 2% midpoint."

"We are maintaining our OCR forecast at 2.50% for now. While the RBNZ has clearly retained a tightening bias and signalled that further removal of monetary stimulus may be required, we believe policymakers will want additional evidence that inflation pressures are becoming more persistent before delivering another hike."

"That said, the risks to our view remain tilted towards further tightening rather than renewed easing. The Jul statement explicitly noted that "some further reduction in monetary stimulus is likely to be required" to return inflation sustainably to the 2% midpoint."

"Should there be clearer evidence that inflation pressures are becoming more entrenched, or that domestic demand is recovering more strongly than expected, we would reassess our policy outlook accordingly. Furthermore, a renewed escalation of the conflict in the Middle East accompanied by persistently elevated energy prices could pose upside risks to the inflation outlook."

"We are maintaining our OCR forecast at 2.50% for now as we believe policymakers will want additional evidence that inflation pressures are becoming more persistent before delivering another hike. That said, the risks to our view remain tilted towards further tightening. A renewed escalation of the conflict in the Middle East accompanied by persistently elevated energy prices could pose upside risks to the inflation outlook."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)