The Finance Minister says the latest consumer price index data is a “blip”, but acknowledges the Reserve Bank will eventually have to start hiking interest rates as the economy grows.
Stats NZ last week reported the annual inflation rate was 3.1% in the 12 months to December 2025, outside the RBNZ’s targeted range of 1-3%, with quarterly inflation for the December quarter coming in at 0.6%.
The annual increase was influenced by rising electricity prices, local rates, and rent, while the biggest driver over the past quarter was international air transport, which contributed one-fifth of the 0.6% quarterly increase.
That headline inflation figure exceeded market expectations as well as the 2.7% forecast by the RBNZ in its November statement.
Immediately following the data release, ANZ said it would adjust its Official Cash Rate (OCR) track to now forecast a hike in December, having previously predicted the move would be in February next year. Economic consultancy firm Infometrics warned interest rate rises could be “back on the table as soon as May”.
Nicola Willis this morning told Parliament’s Finance and Expenditure select committee her confidence that inflation would sit within the target was “based on my confidence in the Reserve Bank’s ability to use its monetary policy tools consistent with its mandate to reach its statutory requirement to keep inflation below 3% over the medium term”.
Labour revenue spokeswoman Deborah Russell said that would mean increasing interest rates. The RBNZ hikes the OCR to increase interest rates, making borrowing more expensive, in order to bring inflation down.
Willis told the Herald afterwards that the Reserve Bank wouldn’t necessarily need to respond with interest rate hikes “immediately”.
“The Reserve Bank’s job is to look at, in that quarterly figure, what are transitory factors, such as the spike in international air flights, that won’t continue into the future and therefore, what is happening with underlying inflation.
“It is not the case that the Reserve Bank necessarily needs to respond to one quarter with an increase to the Official Cash Rate.”
Asked if she was expecting an OCR increase this year, Willis said when OCR increases happen, “which at some point in the future it will do, is a decision for the Reserve Bank”.
“Essentially, the Reserve Bank has had its foot down on the accelerator, in terms of putting that stimulus into the economy through a lower Official Cash Rate. As the economy grows faster and recovers, the Reserve Bank will start easing its foot on that acceleration pedal.”
Willis said after years of inflation being outside of the target range, “the Government got inflation back on target where it was sustained for more than one year”.
“We have had a blip in this quarter. I do not expect to see that sustained.”
The latest annual inflation rate of 3.1% is the fourth consecutive increase to the CPI. It follows a 3% increase in the 12 months to September 2025.
“There are a number of factors affecting inflation, some of which have been international, some of which relate to domestic challenges, particularly rates increases have been a significant contribution to inflation,” said Willis.
“It remains the case that inflation has been in target most of the time, except for this last quarter. The Reserve Bank will be monitoring that closely.”
In a research note last week, ANZ said headline inflation breaching the RBNZ’s target range would “not sit well” with the central bank’s Monetary Policy Committee.
“For the RBNZ, today’s data will make for uncomfortable reading, but indicators of spare capacity suggest there is still some, albeit diminishing, underlying disinflation in the pipeline that should help return headline inflation to within the 1-3% target band.
“That said, when combined with the recent sharp improvement in the activity data, today’s release tips the balance towards hikes this year being likelier than not.
“We are now forecasting the first 25bp hike in December, with two follow-up hikes at the February and April 2027 meetings taking the OCR back to an assumed neutral level of 3% as before.”
Infometrics similarly said that the “continued acceleration” in inflation, despite spare capacity, would start “to raise concerns at the Reserve Bank”.
“Having headline inflation rising, and no further moderation in non-tradeables inflation, is a clear concern, particularly when partial economic indicators suggest strengthening economic growth for the end of 2025 and into 2026,” the update said.
“If inflation was accelerating when economic growth was low or negative, there is a significant likelihood that inflation could accelerate further as growth gains momentum.”
Infometrics said it was holding to the view that the OCR would start to increase from November.
“However, strong growth and inflation numbers in the next few months, combined with a possible hawkish approach from the new Reserve Bank Governor, could force interest rate rises back on the table as soon as May.”
Jamie Ensor is the NZ Herald’s Chief Political Reporter, based in the Press Gallery at Parliament. He was previously a TV reporter and digital producer in the Newshub Press Gallery office. He was a finalist in 2025 for Political Journalist of the Year at the Voyager Media Awards.