Cash rate

IBISWorld forecasts the cash rate to inch lower by 0.03 percentage points in 2026-27 to average 2.72% over the year. This fall largely reflects the roll away from the high-interest rate environment that the economy endured during early 2025-26. Following a cycle of rate cuts in mid 2025-26, inflationary pressures could creep back into the economy. Conflict between the United States and Iran has severed oil supply chains, ballooning global energy and shipping costs. These impacts will compound recent inflationary resurgences, illustrated by the 3.1% 12-month rolling inflation rate posted in the first quarter of 2026. If inflation persistently tops the RBNZ's target 1-3% band, the economy could suffer a new bout of contractionary monetary policy, lifting the OCR from its May 2026 levels of 2.25%.

While inflationary pressures will support a case for contractionary monetary policy during 2026-27, the RBNZ will closely monitor the unemployment rate. According to March 2026 data from Stats NZ, the labour market remains weak, with an unemployment rate of 5.3% coupled with slowing wage growth. In tough labour-market conditions, consumer demand falls, naturally pressuring inflation down. These conditions could give the RBNZ some wiggle room to take a cautious wait-and-see approach before committing to a new rate-hiking cycle.

Still, the monetary policy outlook for 2026-27 offers significantly calmer waters than the economic turmoil experienced between the COVID-19 pandemic and the ensuing series of rate hikes. Following the outbreak of COVID-19, the RBNZ reduced the OCR to 0.25% at an emergency meeting in March 2020. This OCR remained unchanged for much of the pandemic, before rising to 1.0% as economic conditions improved in 2021-22.

Under the expansionary monetary policy regime, the economy overheated. Factors like surging energy prices, global supply chain disruptions and tight conditions, compounded against the artificially low-interest-rate environment. This overstretched the economy, leading to inflation reaching 7.2% in both September and December 2022, slightly below the record high of 7.3% in June 2022. As inflation roared past the 1-3% target range, the RBNZ raised the OCR several times over the three years through 2023-24, with the OCR reaching 5.5% in May 2023. Yet, as businesses struggled in a contractionary economic environment, the labour market contracted, and GDP growth stalled. In response, the RBNZ began easing the cash rate in August 2024, aiming to counter the economy's progressive march towards recessionary conditions. Overall, IBISWorld forecass the cash rate to rise at an average annual rate of 0.44 percentage points over the five years through 2026-27.