NZ inflation is heading above 4%, NZIER warns — and OCR hikes are coming
New Zealand's economic recovery has been stopped in its tracks by the global fuel crisis sparked by the US-Israel-Iran war, with the country now facing surging inflation, weakening confidence, and the prospect of back-to-back interest rate rises — according to NZIER's June 2026 Quarterly Predictions.
The timing could hardly be worse. Lower interest rates had been doing their job through the second half of 2025 and into early 2026, driving a broad-based lift in retail spending, housing activity, and business investment.
The ANZ Business Outlook for May showed some recovery from April's lows, with confidence rebounding 21 points to a net +10 as petrol prices eased — but 90.4% of firms still expect costs to rise over the next three months and the share reporting higher employment fell sharply from +3 to -5.2.
Higher energy costs and geopolitical uncertainty are now creating major headwinds for both households and businesses, with firms pulling back on hiring and investment as activity softens.
Inflation set to breach 4%
Annual CPI inflation was already sitting above the Reserve Bank's 1–3% target band at 3.1% in the March quarter. The surge in petrol and diesel prices since then means NZIER expects it to climb well above 4% in the June quarter.
For now, core inflation and medium-term expectations remain relatively contained, and spare capacity in the economy is limiting firms' ability to pass on costs. But the risk is clear: if businesses and households begin to expect higher inflation to persist, a temporary energy shock could become entrenched. NZIER's base case assumes the conflict is resolved by year's end, with annual CPI inflation returning within the RBNZ's target band by mid-2027.
One mildly reassuring signal: ANZ chief economist Sharon Zollner noted that "there are currently no signs of the price shock morphing into core inflation pressures," with wage intentions remaining close to cyclical lows — though she cautioned it is "early days."
Two OCR hikes forecast
The fuel crisis places the RBNZ in a difficult position — inflation is rising, but demand is weakening and uncertainty is elevated. NZIER says the central bank's primary concern is preventing the fuel price shock from spilling into broader wage and price-setting behaviour.
With the May Monetary Policy Statement reinforcing that concern, NZIER is forecasting the RBNZ will raise the oifficial cash rate by 25 basis points at its July meeting, followed by another hike in September. The RBNZ's May decision confirmed the pressure — the Monetary Policy Committee split 3-3 between holding and hiking, with the governor's casting vote the only thing preventing an immediate move, while the bank revised its inflation forecast to a peak of 4.3% in Q3 2026.
For mortgage brokers, that means two rate rises in quick succession are now the base case — not a tail risk — with direct consequences for variable-rate borrowers and anyone approaching a fixed-rate repricing decision in the months ahead.
ASB's May economic note reinforces the direction of travel, concluding that "OCR hikes still appear to be a matter of when and not if" — with inflation forecast to remain above 4% through to the end of 2026 and unlikely to fall below 3% until mid-2027 at the earliest.
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