“If expectations become less anchored, the OCR may need to move above our current projection of 3.25% in 2027.”
ASB said the outlook is more uncertain than usual, citing several risks including the general election, further swings in oil prices, a possible super El Niño for the rural economy and stronger-than-expected population growth if departures to Australia slow.
“If 2026 has taught us anything, it’s to plan for the worst, but hope for the best,” Mundy said.
ASB economists said climbing fuel prices are delivering a fresh inflation shock.
Annual inflation is expected to dip slightly in the third quarter of the year (Q3) before climbing back above 4% by year-end, they said.
If this was to be the case, the result could delay the return of inflation to within the Reserve Bank’s target 1-3% range until the second half of 2027.
The Consumers Price Index (CPI) increased 4.1% in the 12 months to the June 2026 quarter, up from an increase of 3.1% in the year to March quarter.
Despite the oil shock in the first half of the year, Mundy said New Zealand’s economy is holding up, expanding in both Q1 and Q2.
“The fact that the largest oil price shock in recent history hasn’t derailed recovery is significant. But growth remains narrow and the oil shock has added more hurdles,” she said.
But while recent growth has been driven by strong exports and construction, the domestic side of the economy is a sticking point.
Consumer spending fell in Q2 for the first time after six consecutive quarterly gains, as households pulled back on discretionary purchases.
ASB said it expected spending to have modestly rebounded in Q3, supported by lower fuel prices over the quarter. However, the recent rise in petrol prices has clouded the outlook for the timing and pace of recovery in private consumption.
“The combination of high fuel costs, flat-to-falling house prices, a soft labour market and now rising interest rates will keep households on the sidelines for a while longer in our view,” Mundy said.
“As a result, economic growth will remain uneven, driven predominantly through export demand until some of the headwinds holding back domestic demand ease. We expect this to be a story for 2027.”
Last month, ANZ economists said they were picking three more OCR hikes – in October, February and March.
That would take the OCR to a peak of 3.50%.
They cited a sharp lift in the price of crude oil, the New Zealand dollar falling out of favour and the New Zealand economy currently having “a bit more momentum than expected”.
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