Council rates, power and insurance costs leave the Reserve Bank little headroom
Westpac expects the Reserve Bank to lift the official cash rate (OCR) further than it signalled in September. In a bulletin released on 1 October, the bank's economists pointed to persistent rises in council rates, power bills, and other administered costs.
Westpac is forecasting a 25-basis-point hike at the RBNZ's December meeting and expects the OCR to peak at 4% in 2027, higher than the path the central bank set out in its September Monetary Policy Statement. The RBNZ lifted the OCR by 25 basis points to 2.75% on 2 September, with its published track ending at about 3.28%.
Costs that won't fade
Annual inflation reached 4.1% in the year to June 2026, its highest level in three years. Much of the recent jump reflects higher oil prices since conflict broke out in the Middle East. However, inflation has been above 3% since mid-2025 and above the RBNZ's 2% target midpoint for five years, despite spare capacity in the economy since September 2024, according to RBNZ estimates.
Westpac links much of that persistence to costs in less competitive parts of the economy. Over the past year, local authority rates rose 8.8%, electricity 12% and health insurance 19.2%. Excluding food and fuel, inflation was 2.9% in the year to June 2026, close to the top of the target band.
Because these increases have built up over several years rather than arriving as a single jump, Westpac argues the RBNZ can't simply look past them.
Westpac senior economist Satish Ranchhod (pictured) noted that for the central bank, "it doesn't matter why inflation is elevated", only that it is and how long it will last.
Who feels the squeeze
Council rates and power prices barely respond to interest rates, so tighter policy works mainly through other channels. Westpac expects higher rates to cool construction, discretionary retail spending, and the labour market, while lifting debt-servicing costs for households. Ranchhod called this "an uncomfortable but necessary trade-off".
The bank also noted that long-term inflation expectations among businesses and consumers are close to 2022 levels, raising the risk that higher inflation becomes embedded. ANZ's latest Business Outlook survey points the same way, with a net 48% of firms planning price rises and year-ahead inflation expectations steady at 3.25% in September.
What it means for advisers
A higher peak could mean tougher serviceability tests and higher repayments for clients refixing or borrowing over the next year. Westpac expects inflation to stay above 3% until at least mid-2027, while the RBNZ expects it back within the target band by then.
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