Westpac and ASB agree on a September hike, but flag genuine uncertainty over the tightening cycle's endpoint
The Reserve Bank's 2 September Monetary Policy Statement is shaping up as one of the more predictable OCR decisions in recent memory — but economists at Westpac and ASB say the real uncertainty lies in what comes after, with neutral OCR estimates and end-of-cycle scenarios still diverging meaningfully between banks.
A near-certain hike, but financial conditions already moving
Both banks expect a 25-basis-point hike to 2.75% next week, with ASB senior economist Mark Smith (pictured left) noting a "full 25 basis point hike close to fully priced in by financial markets" makes it the path of least resistance for the bank.
Westpac chief economist Kelly Eckhold (pictured center) similarly expects the decision to be reached by consensus among the Monetary Policy Committee.
ASB points out that domestic financial conditions have "mostly tightened" since the RBNZ's May meeting, with swap rates up 20-25bp. Westpac data shows one- and two-year fixed mortgage rates have risen a further 35bp over the same period.
Independent economist Tony Alexander (pictured right) adds a further wrinkle: bank lending margins on shorter fixed terms are currently running slightly below their two-year average, which could see some banks nudge fixed rates higher regardless of the OCR outcome. As Alexander puts it, "For borrowers, there remains a lot of uncertainty," OneRoof reported.
Where the cycle ends is the bigger unknown
This is where the two banks diverge more. Westpac expects the RBNZ's own published track to show an OCR near 3% by year-end but argues the central bank will ultimately need to go further, assuming a 3.75% neutral rate.
"We continue to assume a 3.75% neutral OCR and so see need to move further than the RBNZ currently forecasts to return conditions to neutral levels," the report said.
ASB takes a different view of neutral, maintaining its own 3.25% assumption — despite noting the RBNZ's May MPS put its average neutral estimate at 3.5%, with short- and long-term components even further apart at 4.1% and 3.1% respectively. ASB expects the OCR to reach 3.25% by year-end via further hikes in October and December.
Westpac frames the near-term path in scenario terms: a hawkish outcome, where the RBNZ signals October and December hikes and pushes the OCR to 3.25% by year-end, or a more dovish pause after September. Westpac puts only 10-15% probability on each scenario, implying its base case remains a steady, data-dependent approach.
Eckhold's own view leans cautious either way, warning that "the improvement in the labour market remains embryonic" even as he expects "higher interest rates will be required through 2027" to bring core inflation back to target.
Labour market and housing still soft
Westpac's appendix data shows the unemployment rate rose to 5.6% in the June quarter — above the RBNZ's own 5.4% forecast — while housing sales have fallen 5% since May. Neither development is expected to derail the RBNZ's tightening bias, but both add context for advisers fielding client questions about borrowing capacity and market conditions heading into the final quarter of the year.
For more insights, read the Westpac, ASB, and OneRoof reports.
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