Inflation is softening faster than forecast. The OCR outlook just shifted.
New Zealand's two largest bank economics teams are now forecasting inflation below the Reserve Bank's own projections, following May price data that came in softer than expected across fuel, airfares, and rents.
May's Selected Price Indexes data, released by Stats NZ, showed overall monthly prices fell 0.2%, with petrol down 3.8% and diesel down 11.4% over the month. The moderation follows a sharp spike driven by the Iran conflict earlier in the year, and both ASB and Westpac have revised their inflation forecasts down in response.
Two major banks now below RBNZ forecasts
ASB senior economist Mark Smith (pictured left) now expects annual CPI inflation to peak at 4.1% in the June 2026 year before declining to around 3.6% by year end — below the RBNZ's May Monetary Policy Statement projection of 4.2% for the June quarter and 4.1% by year end. Westpac senior economist Satish Ranchhod (pictured right) has revised his June quarter forecast to 4.1% (previously 4.4%) and his September quarter estimate to 4.2% (previously 4.5%).
The softer numbers are not solely driven by fuel. Rental inflation — which carries an 11.2% weight in the CPI basket and is directly relevant to clients weighing rent versus mortgage repayments — fell 0.1% in May, with annual rental price growth slowing to just 0.3%, what ASB describes as what looks to be a record low.
Airfares fell 7% over the month. Household energy prices moved the other way, rising 1.2% in May to sit 11.9% higher than a year ago, and food prices rose 1%, with annual food inflation at 3.2%.
Taken together, the May data gives the RBNZ more room to wait — and both banks have updated their OCR calls accordingly.
OCR timing: markets and economists diverge
The stakes are higher than usual. At the RBNZ's last policy meeting, the Monetary Policy Committee was split three-three — three members voting for an immediate hike, three preferring to wait for more evidence on how inflation pressures were evolving. That division makes the next meeting genuinely consequential for borrowers on floating rates and those approaching fixed-rate rollovers.
Westpac expects the RBNZ to hold in July and begin hiking at the September MPS meeting. Ranchhod noted that "the more gradual than expected rise in prices, along with the easing in global tensions, means that the RBNZ has more time up its sleeve to see how the economy and inflation is evolving in response to the Iran war."
ASB takes a different view, pencilling in a July start at 25 basis point increments with the OCR ending 2026 at 3.25% — though it describes this as "not a high conviction call, with risks tilted to a later start to OCR hikes and a more drawn-out hiking cycle." Markets are currently pricing around a 75% probability of a July hike — above both banks' central forecasts.
For more information, read the Stats NZ data and the insights from Westpac and ASB.
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