RBNZ rate cuts off the table as core inflation stays sticky – Westpac

CPI surprise locks in higher‑for‑longer rates

By Mina Martin

27 Jan 2026

Westpac economists say the Reserve Bank (RBNZ) now has far less room to move after December quarter data showed inflation running hotter than forecast and core pressures no longer easing.

Annual CPI has already been reported at 3.1% for the year to December, above RBNZ’s November projections and still outside its 1–3% target band.

Westpac senior economist Darren Gibbs (pictured left) said the firmer print “leaves RBNZ with less room to manoeuvre,” noting that the headline figure was “four tenths higher than the RBNZ had forecast in the November MPS.”

Westpac New Zealand senior economist Satish Ranchhod (pictured right) said the latest numbers confirm that “The RBNZ’s easing cycle has come to a close.”

Core and non‑tradable inflation proving stubborn

While fuel and seasonal travel costs drove part of the quarterly rise, both economists highlight the more worrying signal from underlying measures. Ranchhod notes that the earlier decline in core inflation has “been arrested, with most measures lingering in the upper part of the RBNZ’s target band.”

Gibbs points out that the CPI excluding food and energy is still running at 2.5% year‑on‑year, with trimmed‑mean measures in the mid‑2s, and that non‑tradable inflation – especially administered items such as electricity and other utilities – has been cooling only gradually. Tradables prices, which had been a major disinflationary force, are no longer falling, reducing the drag on overall inflation.

Both economists still expect inflation to drift back inside the target band over the coming year, but more slowly than previously thought. That has led them to bring forward the likely timing of the next hiking cycle, with Ranchhod saying “our forecast of a December OCR increase look odds on at this stage,” and Gibbs judging market pricing of a possible September move as “not unreasonable” – while stressing “there is a lot of water to go under the bridge before then.”

Stronger activity, weak migration, and a soft housing market

Recent data on business activity and services output suggest the economy is starting to re‑accelerate, even as parts of the housing market remain subdued. Composite PMIs have moved back into expansion, but house prices are still edging lower on an annual basis and time‑to‑sell remains longer than average.

Gibbs notes that much slower net migration – now contributing less than 0.2 percentage points to annual population growth – helps explain why housing is soft “considering the low level of mortgage interest rates”, though rising tourism inflows are providing some offset in regional markets.

With inflation stickier, growth indicators firming, and an election set for 7 November, economists now see the risk skewed towards an earlier‑than‑previously‑signalled OCR hike – and little prospect of rate relief for borrowers in 2026.