Westpac switches to an October hike as banks back a 3% cash rate

Four of New Zealand's five big banks now expect the Reserve Bank to lift the official cash rate by 25 basis points to 3% on Wednesday 28 October. Westpac is the latest to join them. Kiwibank is the one bank that doesn't.

Before Thursday's consumer price index release, Westpac senior economist Darren Gibbs told the NZ Herald that what the RBNZ does in October "is an open question". He said it depended on how the Bank viewed the weak New Zealand dollar. After the figures came out, his colleague Satish Ranchhod said market pricing and economists' views had "coalesced around an October hike". Westpac now suspects the RBNZ "will regard this as the path of least resistance, and we now expect that they will deliver," he told interest.co.nz.

Markets moved the same way. Before the release, the Herald reported markets pricing a 70% chance of an October hike and a 100% chance of one by December. After it, interest.co.nz reported that a 25bp hike on 28 October was almost fully priced in.

The RBNZ raised the rate to 2.75% from 2.50% in September and hinted then at a possible pause at its next review, interest.co.nz reported.

The headline number didn't change economists' minds. Annual inflation fell to 3.7% in the September quarter from 4.1% in June, interest.co.nz reported, and came in below the RBNZ's projection of 3.9%. It would have been lower still without a 19.1% jump in petrol prices.

The worry is in the core measures. ANZ senior economist Miles Workman said services inflation rose 0.5 percentage points to 3.1%. CPI excluding food, fuel and household energy rose 0.4 points to 2.9%. He called the core signal "a little worrying".

Price rises are also spreading. Statistics NZ figures cited by interest.co.nz show 85.5% of the CPI basket rose in price over the year. And 54.9% rose by more than 3%, the top of the RBNZ's 1%–3% target band, up from 38.5% in the June quarter. Only about 13% fell, the smallest share since the December 2023 quarter. Infometrics principal economist Brad Olsen said several underlying measures showed pressures broadening at "uncomfortable levels".

ASB expects inflation to climb. Senior economist Mark Smith has raised ASB's forecast for annual inflation in the December quarter to 4.7%. Before the release he had picked 4.5%, on sharp fourth-quarter rises in fuel, airfares and construction costs, interest.co.nz reported. In its September Monetary Policy Statement the RBNZ had projected 3.9% for the December quarter. Smith now says annual inflation is likely to stay well above 3% for most of 2027.

ANZ has the steepest path. Its economists expect a hike on 28 October, a pause on 9 December, then 25bp rises in February and March that would take the cash rate to 3.50%. When ANZ made the call, it said spot Dubai crude was more than 40% above the RBNZ's fourth-quarter assumption of US$83.7 a barrel. The trade-weighted New Zealand dollar was 3.3% below the Bank's assumption, ANZ said, as reported by interest.co.nz.

BNZ has held its call. Senior economist Doug Steel said the September-quarter figure was 0.1 percentage points below the RBNZ's projection for the quarter and 0.2 points below for the year, but BNZ still expects a 25bp hike. Before the release, BNZ economists had already told the Herald: "That all feels a bit too hot for the central bank to sit idly by."

Kiwibank economists Alexandra Turcu and Elliott Lowe don't think a hike is needed. But if one is coming, they said, "get it over and done with... Take the interest rate to 3% and hold it there."

Gibbs pointed out that 28 October is an interim review. The RBNZ won't publish a full set of forecasts until its 9 December Monetary Policy Statement.