Pace of interest rate increases not clear cut
OCR increases are inevitable off the back of yesterday’s 4.1% inflation figure, but the pace of the hikes remains uncertain to a degree, Westpac says.
Wednesday, July 22nd 2026, 3:32PM
by Sally Lindsay
Consumer prices rose 1.5% in the June quarter bringing annual inflation to 4.1% - in line with economists’ forecasts.
Westpac says the inflation figures weren’t as worrying as they could have been, with limited signs of widespread spillover from high oil prices.
Kiwibank economists Alexandra Turcu and Elliott Lowe say headline inflation would have been 2.9% in the June quarter, had petrol and diesel prices not changed.
Higher fuel costs have been the significant driver. Prices for petrol rose 20.1% in the second quarter and prices for other fuels and lubricants, including diesel, increased by 47.7%.
As a result of higher fuel prices, tradable CPI prices jumped 2.7%, with annual tradable inflation lifting to 4.9%, a three year high.
However, the lower New Zealand dollar is also playing an important role, with the NZD trade-weighted exchange rate down almost 4% over the past year, Satish Ranchhod, Westpac senior economist says.
“Excluding food and fuel costs, tradables prices were up 1.9% over the past year – the largest rise since 2023.”
With significant increases in operating costs in the wake of the Middle East war, Ranchhod says imported inflation pressures are set to remain firm over the coming months.
Ranchhod says a key focus for the RBNZ is what’s been happening to other prices in the economy. In particular, are we seeing signs of a broader pick-up in inflation pressures?”
He says at this stage, underlying inflation pressures are still looking relatively contained and that was reflected in core inflation which generally eased slightly over the past few months.
Inflation from the housing group – traditionally an inflation hotspot – has started to firm, with prices up 1.1% and with annual inflation ticking up to 3.6%, boosted by sizeable increases in household energy costs (11.6% year-on-year) and local authority rates (8.8% year on year).
Consistent with anecdotes pointing to sharp increases to materials prices, construction costs rose 1.6% in the second quarter (2.7% year-on-year). The pick-up in construction costs was geographically broad- based.
Annual dwelling rental inflation fell to 0.5%, the lowest since 2000.
Westpac continues to expect the RBNZ will hike the OCR through the back part of the year.
“The pace of those increases remains dependent on the strength of economic conditions more generally,” Ranchhod, says. “We think that hikes are most likely at the RBNZ’s September and December policy meetings.”
Never the full picture
ANZ senior economist Miles Workman says while the bank is hopeful the June quarter will mark the peak in annual inflation following the oil price shock, oil prices are rising again.
He says yesterday’s data was never going to reveal the full impact of the oil shock on medium-term inflation. “For the RBNZ, that is what ultimately matters.
“The Monetary Policy Committee will be most concerned about the effect of the fuel shock on inflation expectations and firm’s pricing behaviour – the extent to which firms pass on higher costs – and whether they reverse those increases when costs fall."
“Adding to these risks, administrative price inflation (e.g. council rates, which are set to feature prominently in the third quarter) is likely to remain elevated for an extended period.”
Neutral levels
ASB doesn’t expect annual CPI inflation to fall below 3% until 2027 at the earliest.
It still expects the RBNZ to continue normalising the OCR from September in 0.25% clips per meeting, taking the OCR to 3.25% by the end of the year.
“We are hoping that returning the OCR to broadly neutral levels will be sufficient to ensure that inflation settles at 2%, Mark Smith, ASB senior economist says.
“This remains a key unknown, with two-sided risks to the monetary policy outlook, with the speed and magnitude of OCR hikes to depend on the data and the economic outlook.
“If inflationary pressures prove to be more benign, we could see a more gradual path of hikes and a lower OCR peak.
“However, if generalised pricing pressures continue to pick up, there is the risk that the RBNZ may have to use the brake pedal and push the OCR above 3.25% in 2027 if inflation remains stubbornly high,” Smith says.
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