The Reserve Bank of New Zealand has lifted the official cash rate this week by 25 basis points to 2.75 per cent, with peak body Retail NZ calling it a knock for retailers.
Retail NZ CEO Carolyn Young said it has been a challenging few years for all Kiwis, with high unemployment and rising cost of living continuing to harm household budgets.
“An OCR increase like this will have an immediate impact on our retailers, as New Zealanders are forced to cut back on spending to meet higher mortgage and rent costs.”
Retail NZ noted that while there were signs of things improving at the end of 2025 and into 2026, the US-Iran conflict “put a hole in the lifeboat”, with the recovery since then being “patchy at best”.
According to an RBNZ committee on monetary policy, inflation in New Zealand increased to 4.1 per cent in the June quarter because of higher fuel prices arising from the conflict in the Middle East. Core inflation, expected wage growth, and inflation expectations remain consistent with inflation returning to the 1 to 3 per cent target band by mid-2027, and the 2 per cent target midpoint later next year.
“After lacklustre growth in the June quarter, New Zealand's economic recovery has most likely resumed but remains uneven,” RBNZ shared in a statement. “Resilient demand from New Zealand’s trading partners and strong export prices are supporting income growth and investment in export-exposed sectors and regional New Zealand.
“In contrast, weak income growth, job insecurity, and flat house prices continue to weigh on household spending and residential investment, particularly in Auckland and Wellington.”
The RBNZ committee added that the recovery is expected to strengthen and broaden, and is expecting the export sector to remain resilient and household spending to gradually increase. Conditions in the labour market should also improve as the recovery gathers pace, RBNZ noted.
“The global economy is facing significant risks that could affect commodity prices and demand for exports. New Zealand’s economic recovery could be stronger or weaker than expected and price pressures could generate more persistent inflation.
“The committee remains vigilant and will respond as necessary to ensure inflation returns sustainably to the 2 per cent target mid-point over the medium term.
Despite this, RBNZ claimed the rate lift this week reduces the risk of another increase later.
Future policy decisions will depend on the committee’s judgement of the balance of risks to medium-term inflation.
Retail NZ noted that the cash rate hike comes in unusual circumstances. Historically, the Reserve Bank would raise rates to cool inflation on a foundation of lower unemployment and higher household spending, according to the peak body.
This comes as unemployment sits at an 11-year high and consumer demand is weak.
“Retailers have been doing everything possible to absorb costs as best they can, rather than pass them on to hard-pressed consumers,” Young said. “However, a rise in the OCR places further upward pressure on retailers with rising costs of debt.
"As a result of the OCR rise, retailers will likely be hit twice as costs go up and spending falls, with homeowners forced to recalibrate their spending to cope with higher mortgage payments.”
Young said that with little to no financial buffer, lower and middle-income earners facing higher mortgage repayments or rent hikes have no choice but to immediately cut back on discretionary retail spend just to cover the basics.
“With margins already tight, Retail NZ is concerned that the additional pressure from rate rises will jeopardise the fragile recovery for a retail sector already under pressure.”
Retail NZ will be closely monitoring any positive changes in the economy as a result of this rise.