ING’s Francesco Pesole expects the Reserve Bank of New Zealand (RBNZ) to deliver a 25bp ‘insurance’ hike in July, taking the policy rate to 2.50%, despite the sharp drop in Oil prices. He notes that May’s rate projections have been largely invalidated by lower Oil and softer inflation, and warns this move could end up being a one-off, limiting further New Zealand Dollar (NZD) support.

Insurance hike seen as finely balanced

"The collapse in oil prices makes the Reserve Bank of New Zealand’s 8 July decision more finely balanced. Even so, we expect policymakers to avoid disappointing hawkish pricing and deliver a 25bp ECB-style ‘insurance’ hike to anchor inflation expectations. That said, the risk of this being a one-off move is rising, which can limit NZD upside."

"Back in May, the RBNZ kept rates on hold at 2.25% in a 3-3 split decision, with Governor Anna Breman casting the tiebreaking vote. The hawks’ concerns echoed those across other developed markets: the risk of inflation expectations de-anchoring and second-round effects. Breman opted for patience, but official rate projections signalled 50-75bp of tightening by end-2026."

"But the oil assumptions underpinning those forecasts could not be more different now. The RBNZ assumed Dubai crude at around $95-105/bbl for the rest of 2026, versus current levels near $65. Accordingly, projections for headline CPI above 4.0% until 4Q26 now look unrealistic."

"We therefore expect a 25bp hike to 2.50%, akin to the ECB’s June ‘insurance’ move. We still narrowly see one more hike in 2026, but the risk of this being a one-off has increased materially."

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