Domestic-driven inflation could force RBNZ into a prolonged holding pattern
ASB and Kiwibank have pushed back their expectations for further interest rate cuts, signaling that the Official Cash Rate (OCR) will likely remain at the stimulatory level of 2.25% through the majority of 2026.
This recalibration follows emerging evidence that while global inflationary pressures are easing, domestic costs within New Zealand remain stubbornly high and "uncomfortable" for policymakers.
The central bank is currently focused on "the last mile" of the inflation fight, ensuring that price stability is fully anchored before any move toward further monetary easing is considered.
This "flat for longer" narrative has become the base-case scenario for the country's major institutional lenders as they navigate a sluggish start to the new year.
A deeper look into the February findings highlights several critical shifts in the commercial landscape:
- The OCR is projected to remain on hold at 2.25% until at least the final quarter of 2026
- Annual headline inflation hit 3.1% in late 2025, sitting just above the RBNZ's 1-3% target band
- Over half of New Zealand’s total mortgage debt is due for repricing within the next 12 months
- One- and two-year fixed mortgage rates are currently holding in the 6.5% to 7.5% range
- Quarterly GDP growth is forecast to remain near zero, reflecting a deliberate economic cooling
- Domestic "non-tradable" inflation remains significantly stickier than imported cost pressures
- ASB has pencilled in a potential 25bp hike for December 2026 to bring the OCR toward a neutral setting
ASB’s extended plateau outlook
ASB’s economic team has taken a firm stance, suggesting that the Reserve Bank of New Zealand (RBNZ) is unlikely to budge from the current 2.25% OCR until very late in the year.
Their analysis suggests that while the aggressive easing cycle seen in late 2025 provided necessary relief, the transition to an even lower rate has been blocked by persistent domestic price pressures.
The bank notes that while international commodity prices have stabilized, local factors such as wage growth and rising insurance premiums are keeping the Consumer Price Index (CPI) above the 2% target midpoint. This environment is creating a significant headwind for long-term interest rate expectations and upcoming mortgage refixes across the retail banking sector.
Furthermore, ASB suggests that the RBNZ is prepared to accept a period of sluggish growth to ensure inflation expectations remain anchored.
This policy means that high debt-servicing costs will continue to test household resilience, particularly as a large portion of the population transitions off historically lower fixed rates throughout the year.
Kiwibank’s domestic inflation analysis
Kiwibank’s economists are focusing on the widening divergence between imported inflation and domestic "non-tradable" inflation, which includes essential costs like council rates and utilities.
Their data shows that while the "imported" side of the ledger is cooling rapidly, the domestic side remains uncomfortably high, forcing the RBNZ into a prolonged holding pattern that could last into 2027.
The bank also points to a plateau in net migration, which is beginning to reduce some of the immediate pressure on rental inflation but has yet to fully cool the services sector.
Kiwibank warns that the "tough love" approach from the central bank is intended to anchor long-term expectations and prevent a wage-price spiral from taking hold, suggesting that recovery is finally coming as forecasts turn more positive only if these domestic pressures subside.
For the lending market, Kiwibank suggests that the "story for 2027" will involve a slow return to higher neutral rates.
However, for the current year, the priority is supporting a solid but slow economic recovery without reigniting price bubbles in the housing market.
