New Zealand's economic recovery is showing promising signs, but it's also bringing challenges, as inflation has pushed beyond the Reserve Bank of New Zealand's (RBNZ) target band of 1% to 3%. The annual inflation rate has hit 3.1% in the fourth quarter of 2025, the highest it has been since mid-2024. This increase, revealed by Stats NZ, follows a 3.0% rise in the previous quarter, signaling a potential shift in the country's monetary policy.
The rise in inflation is attributed to increasing consumer prices, with the Consumer Price Index (CPI) climbing 3.1% from the previous year. Stats NZ spokesperson Nicola Growden noted that while the annual inflation rate is below its peak of 7.3% in mid-2022, it has been gradually increasing since the end of 2024. More than 80% of items within the CPI basket saw price increases over the past year, marking the highest proportion in 18 months.
Several factors contributed to the rising inflation. A significant driver was the increase in electricity prices, which rose by 12.2% and contributed 10.3% to the overall annual inflation. Additionally, local authority rates and payments increased by 8.8%, contributing 8.7% to the inflationary pressure, while rent saw a 1.9% increase, contributing 6.9%. Food and travel costs also played a role, with meat, poultry, milk, cheese, eggs, and overseas accommodation all experiencing notable price hikes.
The RBNZ's primary goal is to maintain inflation between 1% and 3% over the medium term, ideally near the 2% midpoint. To achieve this, the Monetary Policy Committee (MPC) uses monetary policy to manage inflation. The central bank had been anticipating that the economic slack caused by recession and weak activity would naturally reduce inflation, particularly through easing domestic price pressures on wages, rents, and utilities. However, the recent data suggests that these pressures are not easing as quickly as expected.
In response to the rising inflation, economists are suggesting the likelihood of the RBNZ raising the Official Cash Rate (OCR). Mark Smith, a senior economist at ASB, believes that the underlying pricing pressures are increasing, and the fall in domestic inflation has stalled. ASB now forecasts a 25 basis point OCR increase to 2.5% in December, followed by additional hikes in the first half of 2027, bringing the rate to 3%. ANZ senior economist Miles Workman also anticipates a rate hike, most likely in December, emphasizing the RBNZ's need to balance controlling inflation and supporting the economic recovery.
However, RBNZ Governor Anna Breman has adopted a more cautious stance. While acknowledging the "weak signals" such as decreased retail sales and a slow recovery in the labor market, she remains committed to bringing inflation back within the target band. Breman stated that favorable conditions, including spare capacity and subdued wage growth, still exist for reaching the 2% target.
The current situation presents a complex challenge for the RBNZ. While some economists predict the OCR will remain unchanged until 2027, financial markets are pricing in a rate hike by September. The RBNZ must carefully consider its next steps to curb inflation without stifling the nascent economic recovery. The decisions made in the coming months will be crucial in shaping New Zealand's economic trajectory.
