ING said the Reserve Bank of New Zealand’s November 2025 projections were too low on inflation after new CPI data exceeded its forecasts. Fourth‑quarter CPI was 3.1% year on year versus the RBNZ’s 2.7% estimate, while non‑tradable CPI was 3.5% versus 3.2%.
ING expects the RBNZ to keep rates unchanged at its February meeting, with attention on guidance and updated projections. The November path indicated a first rate rise in 2Q27, based on headline inflation dropping to 2.2% in the second half of 2026.
Inflation Proving More Persistent
ING estimates inflation will not fall below 2.4% at any point this year and expects a first‑quarter reading of about 2.7% to 2.8%. That compares with the RBNZ’s 2.3% estimate for 1Q.
ING projects two rate rises in 2026, taking the policy rate to 2.75%, starting in September or October. It also expects one more rise in 2027 to return the rate to a 3.0% neutral level.
It seems the Reserve Bank of New Zealand’s November 2025 projections were too optimistic on how quickly inflation would fall. The fourth-quarter inflation data came in hotter than they expected, which now raises questions about whether the aggressive rate cuts last year went too far. This sticky inflation challenges the view that the easing cycle was perfectly timed.
This view is reinforced by recent data showing a resilient economy. The latest jobs report from January showed unemployment dipping to 3.8%, and the most recent Quarterly Employment Survey indicated that private-sector wage growth remains firm. These figures suggest that underlying price pressures are not fading as quickly as the RBNZ had hoped back in 2025.
Market Pricing And Policy Outlook
We do not expect a rate change at this month’s meeting, so all eyes will be on the bank’s new economic projections and what they signal for the future. Given the stubborn inflation, their old timeline for a first rate hike in mid-2027 now looks far too distant. The market will be watching closely for any hints that this timeline is being brought forward significantly.
We believe inflation will remain sticky, not falling below 2.4% at any point this year, which is well above the RBNZ’s previous estimates. This persistence should force the central bank to act, leading to two rate hikes to 2.75% in 2026, likely starting in September or October. It is becoming clear that the 2025 easing cycle will need to be partially reversed.
For derivative traders, this means the market may be underpricing the hawkish pivot from the RBNZ. Overnight index swaps are still not fully pricing in two rate hikes for 2026, suggesting there is value in positioning for higher short-term rates. A significant repricing could occur once the RBNZ officially updates its guidance in the coming weeks.
Looking further out, the tightening cycle won’t end there, as we anticipate another hike will be necessary in 2027. This would bring the policy rate back to a more neutral level of 3.0%. The path back to price stability appears longer and will require higher rates than anticipated just a few months ago.
