Sticky domestic inflation keeps mortgage rate cuts on hold
New Zealand’s inflation pulse has picked up again, clouding hopes of near‑term relief on mortgage rates and putting fresh pressure on the Reserve Bank.
The consumers price index (CPI) rose 0.6% in the December 2025 quarter, lifting annual inflation to 3.1% from 3%, well above the RBNZ’s November projection of 0.2% for the quarter and 2.7% year‑on‑year.
Westpac senior economist Satish Ranchhod said the result was “stronger than our forecast and above the RBNZ’s expectations”, while Kiwibank chief economist Jarrod Kerr summed it up bluntly: “Today’s inflation print was no good... no good at all.”
Inflation is still far below its 7.3% peak in mid‑2022, but Stats NZ notes it has now risen each quarter since the December 2024 low of 2.2%, nudging the annual rate back above the RBNZ’s 1–3% target band.
Power, rates, and housing costs still doing the damage
For advisers and borrowers, the pain point remains the same: housing‑related costs.
Within the housing and household utilities group, Stats NZ reports that over the past year:
- Electricity jumped 12.2%, contributing just over a tenth of the 3.1% annual CPI rise
- Local authority rates and payments rose 8.8%
- Rents increased 1.9%
“Annual electricity increases remain at their highest since the late 1980s, when there were several major reforms in the electricity market,” prices and deflators spokesperson Nicola Growden said in a media release.
Ranchhod pointed out that non‑tradables (domestically driven) inflation is proving sticky.
Non‑tradables prices rose 0.6% over the quarter, keeping annual non‑tradables inflation at 3.5%. Even excluding housing and utilities, Westpac estimates domestic inflation at 3.4% for the year, with underlying quarterly non‑tradables running at around 0.9%.
Kerr noted that housing and utility costs “remain heated, with electricity prices sparking concern at 12.2% over the year”, and that construction costs saw “a notable lift” despite a still‑soft housing market – a sign of cost‑push rather than demand‑driven inflation.
Travel, fuel, and supermarket staples add to the squeeze
Beyond the housing bucket, households are feeling ongoing pressure in food and travel:
- Meat and poultry prices climbed 8.2% over the year
- Milk, cheese and eggs were up 9.8%
- Overseas accommodation rose 9.1%
- Telecommunication services increased 7.0%
More than 80% of items in the CPI basket recorded price increases over the year – the highest share in 18 months – although Stats NZ says over half of the basket saw rises of 3% or less.
On a quarterly basis, international airfares were the single biggest driver, rising 7.2% and accounting for about a fifth of the 0.6% CPI lift. Petrol prices rose 2.5%, with the average price of 91 octane moving from $2.54 to $2.61 a litre.
“Prices for international air transport typically increase during the New Zealand summer holidays as demand for overseas travel picks up,” Growden said, highlighting seasonal effects. Kerr added that the transport group overall rose 2.3% in the quarter, led by higher airfares and fuel.
One bright spot was fresh produce: vegetable prices fell 16.5% over the quarter thanks to cheaper seasonal items such as tomatoes, cucumbers, capsicums, lettuce and broccoli.
Core and tradables inflation no longer helping the RBNZ
For RBNZ, the most worrying signal is that both imported and core inflation have stopped doing them favours.
Tradables prices rose 0.7% in the quarter, taking annual tradables inflation to 2.6% from 2.2%.
Westpac notes that tradables inflation excluding food and fuel is now 1.7%, with firmer‑than‑expected increases in discretionary items like furnishings and recreational equipment.
“There has been a stark turnaround in tradables inflation,” Ranchhod said. “Over the past year, lower prices for imported consumer goods were a significant contributor to the fall in overall inflation. However, tradable prices are no longer falling, with annual tradables inflation back at its highest level since 2023.”
Core measures, which strip out some volatile components, are also showing renewed resilience.
Ranchhod said “the earlier easing in core inflation has been arrested”, with several gauges now “sitting in the upper part of the RBNZ target band”. Kerr noted that excluding food and energy, core inflation held at 2.5% after trending lower from its late‑2022 peak, while trimmed‑mean inflation has picked up again.
What this means for mortgage rates and broker clients
Both Westpac and Kiwibank still expect inflation to move back inside the 1–3% band over the coming year. But the slower pace of disinflation and evidence of stickier domestic pressures have shifted the debate away from rate cuts.
Westpac argues RBNZ’s easing cycle has effectively ended and says the bank is likely to bring forward its projected timing for OCR hikes, with a first move in December 2026 now looking “odds on” and market pricing for a September 2026 increase “understandable”.
Kerr agrees the next move in the OCR is more likely to be up than down, but still sees that as a 2027 story, even as he warns “the risk of a hike this year is steadily increasing.”
For advisers, the takeaway is clear: rate‑cut expectations need to be tempered in client conversations. With inflation proving sticky and core measures drifting higher, RBNZ has little room to relax. That keeps the focus on product structure, repayment resilience, and stress‑testing client budgets for a longer‑than‑hoped period of elevated mortgage rates.
For more insights, read the Kiwibank and Westpac commentaries.
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