Higher than expected inflation figures released today have lifted the odds of an Official Cash Rate hike in May, according to market pricing.
New Zealand’s Consumers Price Index increased 3.1% in the 12 months to the March 2026 quarter, according to figures released by Stats NZ today.
This was higher than most economists’ estimates.
Wholesale interest rates moved higher in response reinforcing expectations that the Reserve Bank would soon start raising its official cash rate (OCR) from its current level of 2.25%.
Market pricing now points to a 40% chance of a 25 basis point rate hike in May, up from a 20% before the CPI’s release.
“In terms of market expectations for the OCR it looks like they’ve been slightly brought forward,” ASB senior economist Mark Smith said.
The first quarter increase follows a 3.1% increase in the 12 months to the previous December 2025 quarter.
The Reserve Bank of New Zealand’s target band for the annual inflation rate is 1-3%.
The largest upwards contributor to the annual inflation rate was electricity, up 12.5%.
“Higher electricity prices accounted for more than a tenth of the 3.1% annual increase,” prices and deflators spokeswoman Nicola Growden said.
“This was the third quarter in a row that electricity was the largest upwards contributor to the annual inflation rate.”
Other notable contributors were local authority rates and payments which were up 8.8%, meat and poultry (up 8.6%), rent (up 1.2%) and petrol (up 1.1%).
Inflation for the March quarter was 0.9% up from 0.6% in the December quarter.
Higher petrol prices were the largest contributor to quarterly inflation – up 3.5%.
While petrol prices were down in January and February, they rose in March after the start of the Middle East conflict effectively closed the Strait of Hormuz.
“Petrol is the third-largest expense item for New Zealand households after rent and construction,” Growden said.
It accounts for 3.5% of typical household spending.
A rise in pharmaceutical prices also drove inflation with prices up 17.7% on the back of prescription charge increases.
Combined petrol and pharmaceutical products accounted for more than a quarter of the 0.9% increase.
But international air transport was down 7%.
“Airfares to Europe, Australia, and the Pacific Islands drove the fall in international airfare prices in the March 2026 quarter,” Growden said.
Economists had expected the annual rate to land between 2.8% and 3.1%, effectively marking a low point before the oil shock fully took effect.
From here, many bank economists are picking the inflation rate to head to around 4%.
“This quarter’s result was really just the curtain raiser,” Westpac senior economist Satish Ranchhod said.
“Both we and the RBNZ now expect inflation will rise to over 4% in the June quarter.”
Westpac assumed annual inflation would peak at 4.3% in the June quarter, before dropping back to 3.9% by the end of this year.
“Today’s result suggests upside risk to those forecasts,” Ranchhod said.
The middle part of the year would see the full brunt of the recent rise in oil prices, as well as related increases in transport and other costs, he said.
In the closely-watched two year swaps market, rates went up by about 8 basis points to 3.45% in response to the release.
In the currency market, the New Zealand dollar gained about 20 pips to US59.10c while the Aussie dollar cross rate gained 40 pips to A82.40c.
While the “cosmetics” didn’t look great, core inflation was largely contained, ANZ senior economist Miles Workman said.
Inflation excluding food and energy accelerated 0.1 percentage point to 2.6%.
“But that’s about where the ‘hawkish’ take on these data stops,” he said.
“Other measures of core inflation fell in the quarter.”
Tradeable inflation (largely determined by global factors, including movements in the NZD) slowed just 0.1 points to 2.5% for the year, stronger than ANZ’s expectation of 2.2%, he said.
Non-tradeable inflation (driven largely by domestic factors) was unchanged at 3.5% annually, slightly above ANZ and the RBNZ’s February MPS forecast of 3.4%.
- Additional reporting Jamie Gray
Liam Dann is business editor-at-large for the New Zealand Herald. He is a senior writer and columnist, and also presents and produces videos and podcasts. He joined the Herald in 2003.