Overview
Bank of America anticipates that the Reserve Bank of New Zealand (RBNZ) will leave the official cash rate (OCR) unchanged at 2.25% at the central bank's May 27 meeting. The bank says the RBNZ will nonetheless lift its near-term OCR trajectory to account for upward risks to inflation, while keeping its estimate of the eventual terminal rate near 3.2% - a level Bank of America describes as materially lower than current market pricing that signals a more hawkish outlook.
Recent inflation and labour dynamics
In its assessment, Bank of America notes several developments since the Monetary Policy Committee last convened. First-quarter core inflation has eased, April's SPI reading was soft, medium-term inflation expectations remain anchored, and wage pressures appear subdued. At the same time, headline inflation rose to 3.1% in the first quarter and, according to Bank of America, is expected to increase further in the second quarter.
Policy stance ahead of May 27
The bank expects the RBNZ to adopt a wait-and-see posture at the upcoming meeting - keeping the OCR on hold - but to openly discuss the case for pre-emptive rate hikes. Such a discussion would be intended to send a clear signal about the central bank's determination to control inflation and to shape public and market expectations. While holding rates steady, Bank of America argues, the RBNZ will revise its short-term OCR path higher yet maintain a terminal-rate projection below what markets currently anticipate.
Implications for the market test
The May 27 meeting will, according to Bank of America, test how the RBNZ balances easing core inflation measures against a rise in headline inflation pressures. The bank's analysis indicates that even if the central bank pauses at the meeting, it remains prepared to act if inflation developments warrant further tightening.
Key points
- Bank of America expects the RBNZ to hold the OCR at 2.25% on May 27 but to lift the near-term OCR track to reflect upside inflation risks.
- The bank forecasts a terminal rate of roughly 3.2%, which it notes is well below current market pricing that has taken a more hawkish stance.
- Since the last Monetary Policy Committee meeting, first-quarter core inflation eased, April SPI was soft, medium-run expectations are anchored, and wage pressures remain subdued; headline inflation rose to 3.1% in Q1 and is seen rising further in Q2.
Risks and uncertainties
- Upside inflation risk: Headline inflation increased to 3.1% in Q1 and is projected by Bank of America to rise in Q2, creating uncertainty for monetary policy decisions - a key risk for interest-rate-sensitive markets.
- Policy signalling vs action: The RBNZ may signal the need for pre-emptive hikes while holding the OCR steady, producing uncertainty in financial markets about the timing and extent of future tightening.
- Balance between core and headline measures: With core inflation easing but headline inflation strengthening, the central bank faces a trade-off that could complicate forecast communication and market reaction.
Conclusion
Bank of America sees the RBNZ pausing on the OCR at the May 27 meeting while adjusting its near-term rate path upward. The bank's view that the RBNZ's terminal rate sits near 3.2% leaves a gap between official forecasts and current market pricing. That divergence, paired with rising headline inflation, means the meeting will be closely watched for the balance the central bank strikes between caution and pre-emptive signalling.