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New Zealand’s annual inflation accelerated in the fourth quarter, strengthening expectations that the Reserve Bank of New Zealand (RBNZ) is done cutting interest rates and may instead move toward rate hikes later this year. Official data showed inflation rose to 3.1% year-on-year, exceeding both market expectations and the central bank’s own forecasts, and sitting above the RBNZ’s target range of 1% to 3%.
Statistics New Zealand reported that the consumer price index increased 0.6% in the fourth quarter compared with the previous quarter, slightly faster than the 0.5% rise recorded in the third quarter. Annual inflation had stood at 3.0% in the prior quarter. The latest figures came in above a Reuters poll forecast and well above the RBNZ’s November projection of 2.7%, reinforcing the view that inflationary pressures remain persistent.
The market reaction was swift. The New Zealand dollar climbed to a four-month high of $0.5929, as traders priced out any remaining chance of further rate cuts. Expectations for interest rate hikes later in the year increased, while 90-day bank bill yields fell by 7 basis points. Kiwibank Chief Economist Jarrod Kerr noted that the stronger-than-expected inflation data has effectively removed rate cuts from the policy outlook, adding that while two rate hikes priced in by markets may be aggressive, they are not unrealistic given the latest data.
The RBNZ cut the official cash rate by 25 basis points in November to 2.25%, completing a total easing of 325 basis points since August 2024 in response to economic weakness. However, it also signaled that the easing cycle had likely ended as economic growth showed early signs of recovery. At the time, the central bank said it expected inflation to return to around 2% by mid-year.
While inflation has fallen significantly from its 7.3% peak in mid-2022, it has now increased for several consecutive quarters. Rising electricity costs, higher local government taxes, and increasing rents were the largest contributors. Economists warn that improving consumer demand and reduced discounting by businesses could keep inflation elevated, complicating the outlook for monetary policy, especially amid global uncertainty and an upcoming general election.
