Inflation expectations creep up, raising long‑term rate risks
New Zealand inflation is proving sticky, and key surveys now point to an “upward drift in expected inflation, moving further away from 2%”.
That’s the warning from ASB senior economist Mark Smith (pictured left) in his latest Economic Note, echoed by Westpac NZ senior economist Satish Ranchhod (pictured right) in his “First Impression” on the RBNZ’s Q1 2026 Survey of Expectations.
Inflation expectations drifting above target
Headline CPI is running at 3.1% over 2025, but RBNZ’s professional expectations survey still has inflation parked within the 2–2.5% zone. One‑year‑ahead expectations have lifted to 2.59% (from 2.39%), two‑years‑ahead to 2.37%, with five‑ and ten‑year expectations at 2.31% and 2.30% respectively.
Ranchhod notes that “Expectations for inflation over the coming years are still well contained within the RBNZ target band. However, they’ve been drifting higher over the past year and are noticeably above the 2% target midpoint.”
Smith stresses that “inflation expectations are a key nominal anchor in the economy and play a key role in monetary policy formulation.” If upcoming household and business surveys show a similar pattern, RBNZ may feel compelled to “potentially lean against” this drift with tighter policy.
OCR outlook: December hike in focus
Both economists see the official cash rate on hold in the near term.
“We expect the OCR to remain on hold at next week’s MPS,” Smith said, and Ranchhod similarly argued that “RBNZ won’t be rushing to hike interest rates as soon as next week’s interest rate meeting.”
However, with the OCR in expansionary territory (about 100bp below ASB’s neutral OCR estimates) and inflation likely to stay above 2% into 2026, the balance of risks points higher.
ASB says, “We expect a 25bp OCR hike in December, with the OCR hitting 3.25% in the second half of 2027.”Westpac adds, “However, the direction for rates is ‘up’ from here. We’re forecasting a 25bp hike in December, with further hikes beyond that time.”
Action points for Kiwi mortgage advisers
For mortgage advisers, this twin commentary is a clear signal to prepare clients for a gradual upswing in interest rates rather than imminent cuts. Advisers should:
- Revisit refixing strategies with a likely December hike in mind.
- Stress‑test borrowers against higher‑for‑longer mortgage rates.
- Explain that the RBNZ’s “laser focus” on inflation means policy will stay restrictive until expectations are firmly back near 2%.
Positioning advice around these themes will help Kiwi borrowers and investors navigate a more complex, inflation‑driven rate cycle.
For more information, read the full ASB and Westpac reports.
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