US–Iran conflict jolts outlook, ASB backs gradual OCR normalisation path
ASB has revised its interest rate path, arguing that a gradual but faster normalisation of the official cash rate (OCR) is now the “most prudent course of action” in the wake of the US–Iran war.
Senior economist Mark Smith (pictured) says the conflict and its fallout have “significantly changed the narrative, upending the NZ and global economies” as fuel, fertiliser, and other oil‑linked costs jump and uncertainty stalls activity.
The bank now expects annual CPI inflation to peak just under 5% by mid‑2026, rather than drifting back towards 2.5% by the end of 2026 as previously envisaged. By late 2026, inflation is still seen hovering near 4%, with the balance of risks around medium‑term price pressures tilted to the upside.
At the same time, ASB warns that firms and households look to be in retrenchment mode, with economic output likely to contract around the middle of 2026 as higher costs and weaker confidence bite.
Smith describes adverse supply shocks as “economic poison that making NZ worse off as a result” and says the current mix of surging prices and softer growth poses a difficult test for policy makers.
Steady OCR normalisation seen as least risky path
ASB’s central case now has the Reserve Bank beginning a run of 25‑basis‑point OCR hikes from September, with increases at each decision taking the cash rate to 3.25% in early 2027.
Smith notes that “there are a number of options available to the RBNZ, none are without risks and potential economic costs”, but argues that a steady sequence of moves gives the central bank time to assess data while signalling it remains serious about its inflation target.
Other major lenders are broadly leaning towards higher rates, but differ on timing and how high the OCR should go. ANZ now expects three 25bp hikes in July, September, and October, taking the cash rate to 3% and holding it there through 2027. Kiwibank is urging RBNZ not to follow that path, warning that further tightening would be “tone deaf, and potentially reckless” and arguing that earlier moves and softer growth should be enough to pull inflation back towards 2%.
Westpac is closer to ASB on timing but more hawkish on the peak, with hikes starting around September and the cash rate eventually reaching about 4.25% in 2027–28.
Tough choices for RBNZ
For the central bank, Smith says the combination of “soaring near-term inflation and an economy effectively in retrenchment mode” is close to a worst‑case scenario. Keeping rates too low for too long risks eroding the credibility of the inflation‑targeting framework, but lifting the OCR while the economy is weakening could deepen the downturn and add to near‑term pain.
Stay informed with the latest housing market trends and mortgage insights — subscribe to our free daily newsletter.
