The most hawkish rates call of the year landed this week and the market barely flinched, which tells you something about where sentiment has already moved. Infometrics chief forecaster Gareth Kiernan is now predicting three OCR hikes starting as early as May, taking the rate from 2.25% to 3.0%. His longer-range projection puts it at 4.0% by mid-2027 and 4.5% by early 2028. That is a doubling of the cash rate within two years.
He is no longer an outlier. ANZ has forecast hikes in July, September, and October. ASB expects hikes from September with the OCR reaching 3.25% by mid-2027. Traders on NZ debt markets were already pricing a 35% chance of a May hike and 100% by July as of Thursday. The consensus has shifted. The question is no longer whether rates rise but how far.
Fuel lit the fire but the kindling was already dry
The trigger is the Iran War and disruption to the Strait of Hormuz. Diesel has surged 87% and petrol 35% since the crisis began, with diesel now sitting at $3.89 per litre and 91 octane at $3.48. But framing this as a fuel shock misses what was already happening underneath.
December quarter CPI was 3.1%, already above the RBNZ’s 1-3% target band, before any Middle East disruption. Non-tradable inflation was running at 3.5% and core inflation at 2.8%. Essential goods and services inflation was at 3.8% annually, well above its long-term average of 3.2%. The economy was already warm before fuel prices poured accelerant on it.
Kiernan now forecasts inflation peaking at 4.8% this quarter. Westpac’s Kelly Eckhold warned the government’s previous worst-case figure of 3.7% was likely closer to baseline, with some scenarios pointing as high as 7.5%.
The stimulus hangover hits at the worst possible time
Here is the detail most coverage is underplaying. The RBNZ cut aggressively through 2024-2025, reaching 2.25% by November. Those cuts take 12 to 18 months to fully work through the economy, meaning cheap-money stimulus is still feeding into activity and prices right as inflation reignites. Infometrics CEO Brad Olsen called it a “potent cocktail” of hotter activity, hotter inflation, and rate cuts still flowing through.
Simultaneously, growth is collapsing. Infometrics has slashed its annual GDP forecast from 2.5% to 1.3%. Treasury’s HYEFU had already projected just 1.7% real GDP growth before the fuel shock. The economy is getting squeezed from both ends: rising costs and falling demand. BNZ’s Stephen Toplis captured the mood, saying “the spread of potential outcomes is one of the greatest that we have ever seen”.
Who gets hurt first
The RBNZ’s own data already shows the stress. Commercial property lending availability sits at -17.8 and household lending at -11.8, the tightest credit conditions of any category surveyed, before a single hike has been delivered. Banks have already started lifting mortgage rates without waiting for the RBNZ.
The businesses most exposed are obvious once you look at the numbers. Commercial property owners face compressed valuations and rising servicing costs into the tightest credit market in the survey. Anyone on floating rates gets repriced immediately. Consumer-facing businesses are already watching customers prioritise essentials over discretionary spending, with essential inflation at 3.8% while discretionary items sit at just 1.8%. Rate hikes add mortgage stress on top of fuel costs, and that gap will widen.
The most vulnerable category may be the hardest to quantify: businesses that borrowed heavily during the 2020-2021 low-rate era assuming rates would normalise to 2-3%, not 4-4.5%.
The dissenters have a point but it does not matter
Kiwibank economists Jarrod Kerr and Alexandra Turcu have called potential hikes “tone deaf and potentially reckless”, arguing a supply shock should not be met with demand destruction. They are right on the economics. But ANZ chief economist Sharon Zollner, while acknowledging the RBNZ would be “kicking the economy when it’s down”, still forecast three hikes because the risk of embedded inflation is worse.
Governor Anna Breman held the line on April 8 but warned the bank was prepared to act with “decisive and timely increases” if inflation became entrenched. With a general election in November 2026, three consecutive hikes before polling day would be politically brutal for the National-led government, even if the RBNZ is technically independent.
None of that changes the arithmetic for business owners. Whether the first hike lands in May, July, or September, the direction is locked in. A path to 4.5% means borrowing costs return to the levels that caused significant distress in 2023-2024. The businesses that used the cutting cycle to take on more debt, refinance at floating rates, or expand into property are about to discover that the floor under their assumptions was never really there.
Sources
- NZ Herald: Infometrics tips three OCR hikes as early as May in hawkish RBNZ call
- Newswire: ANZ tips three rate rises as Treasury warns inflation could go higher than expected
- RNZ: Biggest bank predicts triple interest rate hike
- RNZ: Inflation rises back above Reserve Bank’s target rate
- B2B News: RBNZ OCR hike risk May 2026 – what businesses need to know
- RNZ: OCR increase could happen as soon as May
- RNZ: Kiwibank economists warn against reckless rate hikes
- RNZ: Reserve Bank adamant inflation spike will be brought under control
- Interest.co.nz: Hold for now and worry later
- Treasury: Half Year Economic and Fiscal Update 2025
- Newsroom: Reserve Bank under almost impossible pressure