Kiwis should expect interest rates to start rising later this year, say economists, who have brought forward their forecasts after today’s elevated inflation rate.
The annual inflation rate for 2025 was 3.1% – up from 3% for the year to September, the latest Consumers Price Index data showed.
That puts the inflation rate outside the Reserve Bank of New Zealand’s target band of 1 to 3%.
The result was well above the RBNZ’s November pick of 2.7%.
While economists don’t expect any sudden moves from the RBNZ, BNZ economists now see the Official rising in September with another in December.
That brings them into line with market pricing.
BNZ head of research Stephen Toplis described inflation as “worryingly high”.
ANZ economists also moved their forecast picking the OCR will rise in December rather than February 2027.
“For the RBNZ, today’s data will make for uncomfortable reading,” said ANZ chief economist Sharon Zollner.
There was still some capacity for it to fall back into the target band in the coming months, but the prospects for an extended period of low inflation had diminished.
“Today’s release tips the balance towards hikes this year being likelier than not,” Zollner said.
“We are now forecasting the first 25 basis point hike in December, with two follow-up hikes at the February and April 2027 meetings.”
That would take the OCR back to an assumed neutral level of 3%.
Financial markets have a more hawkish outlook and are already pricing in a hike by September and two hikes by December.
In the 12 months to the December 2025 quarter, the largest contributors to Consumers Price Index inflation were the housing and household utilities group, which includes rates and power, Stats NZ said.
Other significant contributors were meat and poultry, up 8.2%, and milk, cheese and eggs – up 9.8%.
Higher prices for international air transport were the largest contributor to the quarterly inflation rate, up 7.2%.
Inflation rose at 0.6% in the December quarter.
Non-tradable inflation (driven largely by domestic factors) was unchanged at 3.5%.
Tradable inflation (largely determined by global factors, including movements in the New Zealand dollar) accelerated 0.6 points to 2.6%.
The New Zealand dollar firmed slightly to US59.24c after the data came in slightly over market expectations of 3%, while wholesale interest rates were little changed.
“With inflation cooling more gradually than the RBNZ had assumed and signs that activity has been picking up, the RBNZ’s easing cycle has come to an end,” Westpac senior economist Satish Ranchhod said.
“It’s likely the RBNZ will be bringing forward their forecasts of when the OCR will start to rise.”
However, there was no expectation that increases in the first half of 2026 were on the cards, he said.
Despite being outside the RBNZ’s target band, the Monetary Policy Committee has the capacity to look through the volatile goods like petrol and food and focus on the core inflation figure.
“For the RBNZ, some of that upside surprise was likely related to volatile prices for imported items like petrol and international airfares, Ranchhod said.
However, domestic prices had also been running hotter than the RBNZ expected.
“It’s likely that the firmness in durables prices was also a surprise to the RBNZ,” he said.
“Several core inflation measures picked up and are sitting in the upper part of the RBNZ target band.”
Today’s result increased the chances of the RBNZ hiking later this year, ASB senior economist Mark Smith said.
He still expected annual CPI inflation to gradually ease over 2026 but not as much as the RBNZ had been expecting.
“A core judgement the RBNZ has made is that the large margin of spare capacity and contained housing market backdrop will help to cool domestic inflationary pressures,” he said.
“Our fear is that the tick up in surveyed pricing intentions as demand recovers will halt the push lower in generalised inflation,” he said.
“In short, there is the risk that annual inflation over 2026 will not cool as much to the circa 2% RBNZ expectation.”
Liam Dann is business editor-at-large for the NZ Herald. He is a senior writer and columnist, and also presents and produces videos and podcasts. He joined the Herald in 2003.
Stay ahead with the latest market moves, corporate updates, and economic insights by subscribing to our Business newsletter – your essential weekly round-up of all the business news you need.