ING’s Francesco Pesole expects the Reserve Bank of New Zealand (RBNZ) to hike insurance by 25 basis points in July, raising its policy rate to 2.50%, despite a pointed decline in oil prices. It notes that May’s interest rate forecasts have been largely invalidated by lower oil and milder inflation, and warns that the move could prove to be a one-off and limit further support from the New Zealand dollar (NZD).

Insurance enhance seen as well-balanced

“The collapse in oil prices makes the Reserve Bank of New Zealand’s July 8 decision more measured. Still, we expect policymakers to avoid disappointingly hawkish pricing and increase ECB-style insurance by 25 basis points to anchor inflation expectations.” That said, the risk of this being a one-off move is increasing, which could limit NZD’s upside.”

“In May, the RBNZ kept interest rates unchanged at 2.25% in a 3-3 split decision, with Governor Anna Breman casting the deciding vote. Hawks’ concerns mirrored those of other developed markets: the risk of unanchored inflation expectations and second-round effects. Breman opted for patience, but official interest rate forecasts pointed to a 50-75 basis point tightening by the end of 2026.”

“However, the oil assumptions underlying these forecasts could not be more different now. The RBNZ has assumed a Dubai oil price of around $95-$105 per barrel by the end of 2026, down from current levels of around $65. As a result, forecasts for a headline CPI above 4.0% by the fourth quarter of 2026 now appear unrealistic.”

“We therefore expect an increase of 25 basis points to 2.50%, following the example of the ECB’s June ‘insurance’ move. It is still unlikely that we will see another increase in 2026, but the risk of this being a one-off has increased significantly.”

(This article was created with the support of an artificial intelligence tool and has been reviewed by an editor.)