Economist says weak demand and easing pressures support further OCR relief
Inflation may have edged back up to 3%, but Westpac says that won’t stop the Reserve Bank (RBNZ) from continuing its easing cycle.
In his latest commentary, Westpac senior economist Satish Ranchhod (pictured) said the September CPI result hasn’t changed the bigger picture – inflation is easing beneath the surface, and RBNZ still has room to cut rates in November.
“Inflation in New Zealand has picked up again, rising to 3% in the year to September. That’s up from 2.7% in the year to June and right at the top of the RBNZ’s target band,” Ranchhod said. “But while we are seeing continued large price increases in some areas, underlying the surface the broader picture of price pressures is a lot better contained.”
Westpac sees ‘softness beneath the surface’
According to Ranchhod, the latest price jump was driven by essentials such as food, power, and council rates rather than widespread inflation.
“The latest pickup in inflation has been heavily centred around a few specific areas,” he said, pointing to a 4.6% increase in food prices, 11% rise in electricity costs, and 8.8% lift in local council rates.
“These costs relate to essentials, meaning households have limited ability to substitute their spending,” he said, adding that such prices are less responsive to monetary policy.
Westpac expects food inflation to moderate as supply conditions improve, though regulated price pressures like rates could remain elevated for years due to local government funding challenges.
Core inflation trending lower
Despite the headline rise, Westpac says core inflation – which strips out volatile items – is already trending below 3%.
“The various measures of core inflation have drifted down below 3% in recent months, and inflation excluding food and regulated prices is running at just over 2%,” Ranchhod said.
That trend reflects a weak economy and a cooling labour market.
“With softness in domestic demand and weakness in the labour market, price increases in discretionary areas have been modest,” Ranchhod said.
He highlighted that housing-related costs – about one-fifth of the CPI – have slumped.
Rental inflation is at its lowest level since 2019, while construction cost inflation is at its lowest since 2009, reflecting low population growth and subdued building activity.
One more OCR cut likely in November
With underlying price pressures easing, Westpac expects one final 25bp rate cut at the RBNZ’s November meeting, which would bring the Official Cash Rate down to 2.25%.
“With underlying softness in inflation, the RBNZ is set to cut the OCR again in November,” Ranchhod said.
“Subdued price pressures in the discretionary and more cyclical areas of the CPI are significant for the RBNZ. Combined with the expected easing in food prices, overall inflation is expected to drop back to levels comfortably within the RBNZ’s target band.”
The Westpac economist added that monetary policy remains effective but slow to filter through.
“With around 90% of mortgages on fixed terms, households have only recently begun to feel lower debt servicing costs,” Ranchhod said. “We’ll be watching for signs that spending is starting to turn as we head into the summer months.”
For advisers: Easing cycle keeps borrowers engaged
For mortgage advisers, Westpac’s outlook signals continued rate stability and renewed borrower confidence heading into 2026. With the big bank forecasting further easing, the focus for advisers is shifting to loan structuring – helping clients lock in value while retaining flexibility.
Access the full Westpac report here.
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