Reserve Bank’s surprise OCR hold: economists ‘flabbergasted’, borrowers relieved, savers stuck

The Reserve Bank has held the official cash rate at 2.75% in a split decision that defied market expectation, sending the dollar falling and prompting economists to warn inflation could prove harder to shift, Henry Oliver writes in today’s excerpt from The Bulletin.

The Reserve Bank’s monetary policy committee voted 4-3 to hold the official cash rate at 2.75%, RNZ reported yesterday, with governor Anna Breman siding with external members Prasanna Gai and Carl Hansen and newly appointed senior manager of economics Rebecca Williams. Chief economist Paul Conway, assistant governor Karen Silk and external member Hayley Gourley voted to hike.

The bank said annual inflation is expected to rise to 4.4% in the December quarter, largely reflecting fuel futures prices, and that tighter policy is “likely to be required but remains conditional on the economic outlook.” The New Zealand dollar fell about 1.3% to 56.1 US cents, RNZ reports.

‘Frankly flabbergasted’

Economists were generally critical of the decision. BNZ head of research Stephen Toplis told the Herald’s Liam Dann he was “frankly flabbergasted,” noting it is “rare that they move diametrically against” market pricing and consensus – and that the bank had “added to inflationary pressure instantaneously by encouraging an already soft New Zealand Dollar to fall further.”

ASB senior economist Mark Smith described a “dovish hold,” warning risks to the OCR over 2027 were “tilted further to the upside,” and picked consecutive 25 basis point hikes in December, February and March to a 3.5% peak. ANZ chief economist Sharon Zollner said a hike on Wednesday “would have been the most prudent course” and expected the same three-step path to 3.5%. Infometrics’ Brad Olsen said something had “spooked” the committee: “There seems limited direct evidence of an abrupt global downturn in the next six weeks!”

Capital Economics said the hikes were “delayed, not cancelled.” Financial markets now price about a 75% chance of a December rise, according to RNZ.

Breman’s defence

Breman pushed back on criticism of holding with inflation at 3.7%, outside the 1-3% target band. “When we look very deeply at this number, 3.7% is far too high, but it was actually lower than we expected,” she said, according to the Herald. Higher fuel prices had not fed into other categories as feared, inflation expectations remained “well anchored," and wage growth was below what returning to target required. She said further rises were still likely, and did not rule out more than the roughly 3.25% peak projected in September. She also rejected any suggestion the election timing played a part.

Borrowers and savers

Westpac’s Kelly Eckhold told RNZ’s Susan Edmunds the one-year swap rate had already fallen 20 basis points, implying downward pressure on mortgage rates if sustained – and said holding was the right call. Infometrics’ Gareth Kiernan expected easing in six-month and one-year rates; Cotality's Kelvin Davidson said fixed rates were unlikely to spike because a hike had already been priced in, but called the reprieve “temporary.” Simplicity’s Shamubeel Eaqub cautioned borrowers to “carefully consider their ability to absorb higher mortgage rates in the future.”

For savers, the Herald’s Jenée Tibshraeny reports the hold will keep deposit rate rises at bay. With $275bn deposited in New Zealand banks and credit growth subdued, banks have had little reason to compete for funding. Wholesale rates fell sharply at the short end, which Wedge founder Dave McLeish said would hold back shorter-term deposit rates. Average new three-year deposits were 4.49% in September, 80 basis points above November; six-month and one-year were 3.59% and 4.02%.

Retailers and the margin argument

Retail NZ chief executive Carolyn Young told RNZ’s Felix Walton the lower dollar would squeeze margins on imported goods, though a stable OCR could lift consumer confidence into the holiday season.

In The Post, Banking Reform Coalition convenor Kent Duston argues the OCR’s effect is muted by bank margins: the gap between the 2.75% OCR and ANZ’s 6.29% floating rate is 3.54%, against 2.89% in Australia between the 4.60% cash rate and 7.49% floating rate. He cites the Commerce Commission’s 2024 study describing the four major banks as an oligopoly earning unjustified margins, and notes Breman declined to compare New Zealand margins with Sweden’s when asked by The Post’s Tom Pullar-Strecker.