Fears rise over how long inflation can remain near 3% before Reserve Bank opts to get tough

Tuesday, 20 January 2026

ASB is forecasting Stats NZ will report annual inflation has risen to 3.1% when the figures are released this Friday , raising a possible conundrum for the Reserve Bank, which has been expecting it to fall to 2.7%.

It had been widely assumed among economists that inflation had peaked in the three months to the end of September, when it came in at 3.04% and was “rounded down” in Stats NZ’s reporting to 3%.

But higher-than-expected monthly data on the prices of many key items released by Stats NZ a week ahead of the full December-quarter inflation result has prompted some banks to revise their forecasts.

The monthly data showed relatively strong hikes in the cost of airfares, gas and electricity, with annual food-price inflation declining but still running at 4%.

ASB senior economist Mark Smith said it had expected prices for the goods and services for which Stats NZ produces monthly data to have fallen, but instead they had risen.

“While a seasonal jump in airfares provided the major upward contribution, upward surprises were evident in a number of key components, including energy and accommodation,” he said.

The Reserve Bank last reset the Official Cash Rate (OCR) to 2.25%, to stimulate economic activity and reduce what it assumes is spare capacity in the economy.

But higher-than-expected inflation could be expected to increase pressure on the central bank to raise interest rates sooner than later.

The Reserve Bank is next due to review the OCR on February 18, when it will release its first monetary policy statement for the year.

“We don’t envisage the Reserve Bank will be in a mad rush to change the 2.25% OCR, but caution that it may step in if the economy heats up too quickly and inflation remains stuck around 3%,” Smith said.

ANZ and Westpac are less pessimistic, but both nevertheless increased their annual inflation forecasts in the wake of the monthly data, predicting it would come in at 3%.

BNZ research head Stephen Toplis is tipping 2.9%, but noted that would still be above the Reserve Bank’s November forecast.

“We don’t think the run of data is enough to have the bank hiking its cash rate soon. But the data flow so far in the New Year firmly supports the case that the next move in interest rates is up,” he said.

ANZ senior economist Miles Workman also emphasised stronger inflation was likely to make the Reserve Bank’s monetary policy committee cautious.

“But with underlying inflation still going the right way, the bar for delivering anything other than a hold in February remains high.”

Plenty of uncertainty remained about whether the Reserve Bank had done enough to deliver a sustained recovery, he said.

“Recent data suggests the recovery has certainly got off to a strong start, but it’s early days.

“We think it’ll take much stronger fourth-quarter inflation than our forecast to take a hold at the February MPS off the cards, but the risk that hikes arrive a little earlier than our forecast of February 2027 appears to be lifting.”

Westpac revised up its annual inflation forecast to 3%, from 2.8% previously.

“December’s lift in consumer prices is mainly due to higher prices for petrol, as well as seasonal increases in travel and accommodation costs. Balanced against those increases has been a seasonal fall in food prices,” senior economist Satish Ranchhod said.