‘Our new laser-focussed-on-inflation RBNZ Governor will not be amused’: Economists say OCR hike in 2026 ‘likelier than not’ following latest annual inflation figures

The chances of the Official Cash Rate (OCR) being increased this year “rose significantly” as annual inflation hit an 18-month high of 3.1%, BNZ head of research Stephen Toplis says.

On Friday, Statistics New Zealand announced annual inflation, as measured by the consumers price index (CPI), rose to 3.1% in the December quarter - breaching the Reserve Bank’s target range for inflation.

The Reserve Bank (RBNZ) is charged with maintaining inflation between 1% and 3%, and it specifically targets 2%. During its November OCR announcement, the Reserve Bank (RBNZ) projected inflation for the December quarter to be 2.7%.

Following the CPI results on Friday, Toplis said: “We think our new laser-focussed-on-inflation RBNZ Governor will not be amused.”

“To start with, the quarterly increase of 0.6% was a big miss for a central bank that was forecasting 0.2% for the period.”

“The miss was greater on tradables than non-tradables but both came in higher than anticipated. Tradables rose 0.7% against a 0.1% pick and non-tradables 0.6% against a 0.4% prediction,” Toplis said.

“The miss is one thing but more problematic is the fact that the headline reading has a three in front of it.”

Toplis said this risks pushing inflation expectations higher and may encourage the increasing number of businesses who appear to be thinking about price increases “to give things a nudge”.

BNZ had initially picked a rate hike for February 2027 but they had also acknowledged that was looking late. “Today’s numbers certainly support that view,” Toplis said.

The central bank’s forecast was made before more recent information like the Selected Price Indexes (SPI) which features about 47% of the contributors to the CPI. The SPI results showed higher than expected inflationary pressures, leading to major bank economists to tweak their projections for Friday’s CPI results - most settling on 3.0% and one ASB economist picking 3.1%.

Election consideration

Toplis said the general election, which has been set for November 7, needs to be taken into consideration.

“The RBNZ is operationally independent so it can broadly do what it wants when it wants but central banks are not keen to become embroiled in election campaigns if it can be avoided.”

“We are thus formally shifting our expected first rate hike to September of this year. We have a pause in October and then rate hikes in each of the next meetings, restarting in December, through to a peak of 4.0% by September 2027.

“Our October pause is simply doffing our hat to the election. In reality that may be being a bit cute and unnecessary,” Toplis said.

ASB senior economist Mark Smith said a core judgement the RBNZ had made is “that the large margin of spare capacity and contained housing market backdrop will help to cool domestic inflationary pressures”.

“However we are less sanguine on the inflation outlook and expect only gradual easing."

Smith said there was a risk that annual inflation over 2026 "will not cool to the circa 2% RBNZ expectation. Today’s CPI data and the RBNZ estimates for core inflation supports this view".

"As such, we have bought forward the timing of OCR hikes and have RBNZ beginning to normalise OCR settings from late 2026 (rather than early 2027)." 

Smith said they had pencilled in a 25 basis-point hike in December with a further 50 basis points of hikes in the first half of 2027.

"This will take the OCR to 3%, in line with our neutral OCR estimates. Rather than tapping on the monetary policy brakes, the moves should be interpreted as the RBNZ easing off on the accelerator."

‘Uncomfortable reading’

ANZ economists Sharon Zollner and Miles Workman said annual inflation breaching the RBNZ’s target range “will not sit well with the Monetary Policy Committee ” and there’s lots of data for the committee to weigh up before the next OCR announcement in February.

“Indicators of spare capacity suggest there is still some, albeit diminishing, underlying disinflation in the pipeline that should help return headline inflation to within the 1% to 3% target band.

“That said, when combined with the recent sharp improvement in the activity data, today’s release tips the balance towards hikes this year being likelier than not.”

The CPI data would make for uncomfortable reading for the RBNZ, they said.

“However, given the housing market remains lacklustre, fixed interest rates have started rising, indicators of spare capacity suggest the output gap is still negative, and it is still early days in the recovery, we think the hurdle to do anything other than hold the OCR at 2.25% at the February [18] Monetary Policy Statement (MPS) and await more data is high.”

Initially ANZ economists had forecast OCR hikes kicking off in February 2027. This “now looks improbably far off, and so we are bringing the kick-off forward to the December MPS”, they said. 

“But the RBNZ will be aware that if it comes out too hawkish in February and thereby tightens monetary conditions before current green shoots have a chance to get established, those shoots could easily wither.”

‘A lot of water to go under the bridge’

Westpac NZ senior economist Satish Ranchhod said while they expected inflation to drop back inside the RBNZ’s target band over the coming year, the central bank’s easing cycle had come to an end.

“It’s likely the RBNZ will be bringing forward their forecasts of when the OCR will start to rise. But nevertheless, not to the extent where OCR increases in the first half of 2026 are on the cards.”

Westpac NZ economists are forecasting a December OCR increase and Ranchhod said; “market pricing for a hike in September looks understandable – although there is a lot of water to go under the bridge before then”.

As soon as May?

Infometrics chief executive Brad Olsen said they had previously stated last year that further OCR cuts below 3% would not really stimulate the economy until the second half of 2026.

“Those cuts would prove hard to justify if inflationary pressures remained too hot. We also noted that strengthening growth would eventually require increases in the OCR, to 3% or higher, to remove the additional stimulus from the economy. Today’s stronger headline inflation reinforces this view,” Olsen said.

Olsen said while he expected market pricing for the OCR and wholesale interest rates to rise following Friday’s CPI figure; “the Reserve Bank’s response at next month’s Monetary Policy Statement is uncertain”.

“Does the Bank try to wish away higher inflation, and tell the markets they’re wrong to be picking faster interest rate rises than forecast? Or does the Bank acknowledge the risk of raising interest rates sooner, given the data that’s in front of it?”

“At this stage, we are holding to our view of the Official Cash Rate starting to increase from November this year."

"However, strong growth and inflation numbers in the next few months, combined with a possible hawkish approach from the new Reserve Bank governor, could force interest rate rises back on the table as soon as May," Olsen said.

OCR hike - a story for 2027?

Kiwibank economists Jarrod Kerr, Mary Jo Vergara and Sabrina Delgado said; “over the coming year, we still expect inflation to fall back within the RBNZ’s target band”.

“But the stickiness in inflation suggests that the next move for the RBNZ is more likely to be up than down.”

The Kiwibank economists said: “Market traders have turned their attention to the possibility of rate hikes (not cuts) this year, with two full hikes priced in wholesale rates markets (namely the Overnight Indexed Swap strip).”

“We agree, the next move is likely to be a hike. And we hope that is the case. Because rate hikes follow an economy that has recovered."

“But we think it is still a story for 2027. Although the risk of a hike this year is steadily increasing.”