Rates, inflation and what comes next

Six months ago, the prevailing question in New Zealand economics was how low the Reserve Bank would cut. The OCR had dropped from 5.5% in mid-2024 to 2.25% by November 2025, and the easing cycle looked like it had more room to run. But then came the US-Iran conflict, a global oil shock, and CPI data that came in hotter than expected. Now the question is not if interest rates will rise, but when, and how fast.

In the meantime, mortgage rates are moving higher and forecasts now arriving from the major banks and economic consultancies are pointing firmly in one direction.

The OCR hold and what the RBNZ said
The Reserve Bank held the OCR at 2.25% at its 8 April Monetary Policy Review. But the hold masked a notably hawkish statement. The committee acknowledged that inflation – sitting at 3.1% annually as at March 2026 and already above the 1-3% target band – is expected to spike further.

Households are feeling the pinch, absorbing a 3.1% increase in (CPI) in the 12 months to the March 2026 quarter, according to figures released by Stats NZ this month. This was higher than most economists’ estimates, lifting the odds of an Official Cash Rate hike in May.

The RBNZ’s own forecast has headline CPI hitting 4.2% in the June quarter on the back of fuel price rises from the Middle East conflict.

The committee said it was “vigilant to any generalised inflationary pressure” and stood ready to act. Infometrics chief executive Brad Olsen, who unpacked the decision in a widely-circulated podcast, noted the Reserve Bank was trying to avoid a knee-jerk reaction – but was clear that its focus had shifted firmly toward inflation risk rather than supporting the economic recovery.

ANZ calls three hikes, starting July
The most significant call came from ANZ, New Zealand’s largest bank. Its economists now expect three consecutive OCR increases – in July, September, and October – which would take the rate from 2.25% to 3%. That is a significant acceleration from ANZ’s previous forecast of a first hike in December.

Chief economist Sharon Zollner’s reasoning centres on one lesson from the Covid era: the Reserve Bank kept policy too loose for too long, and the inflation that followed required a much more damaging correction. Her view is that the RBNZ will not want to repeat that mistake, and that three hikes to 3%, still within the RBNZ’s neutral range, would be potent enough to do the job without needing to go higher.

Zollner is careful to flag the uncertainty in her own call. She describes a July kick-off as “not a high-conviction view” and urges everyone to take forecasts, including ANZ’s, with a generous pinch of salt. Nevertheless, the bank followed its revised forecast by immediately raising its own fixed home loan rates.

Infometrics goes further

Economic consultancy Infometrics has issued an even more hawkish assessment. Chief forecaster Gareth Kiernan joins ANZ in forecasting three hikes in 2026, starting in July, but adds that a May move cannot be ruled out. Infometrics’ endpoint is also higher: the OCR reaching 4% by mid-2027 and potentially 4.5% by early 2028.

Kiernan’s concern is about where inflation was already heading before the oil shock hit. Brad Olsen made a similar point in his April analysis: fuel spending in March came in around $580 million, up roughly 10% on a year earlier. But Olsen noted that even before factoring in fuel, underlying pricing pressures in January and February were already more intense than the Reserve Bank had anticipated. The oil shock has landed on a base where inflation was already running hotter than comfortable.

Infometrics forecasts headline CPI peaking at 4.8% this quarter. Even if fuel prices moderate in the second half of 2026, Kiernan projects annual inflation at 3.9% by March next year – still well outside the RBNZ’s band – before gradually returning to 3% by late 2027. That profile makes a strong case for the Reserve Bank moving earlier and harder than it currently signals.

Kiwibank pushes back
Not everyone is on the same page. Kiwibank’s economists have pushed back against the ANZ view sharply, calling the case for July hikes “tone deaf” and warning that hiking into a demand-side shock risks inducing another recession.

Kiwibank’s argument is that the war-driven inflation is a supply shock, not a sign of overheating demand. Households are already pulling back: consumer confidence has fallen sharply, spending on non-fuel categories declined 0.1% in March on a seasonally adjusted basis, and the economy is likely contracting in the current quarter. Hiking into that environment, Kiwibank argues, would do more damage than good.

There is also a data timing problem that Kiwibank raises. The June quarter CPI – which would show whether inflation is becoming genuinely embedded – won’t be published until July, after the Reserve Bank’s July meeting. That means the RBNZ would be making a significant policy call before seeing the key data it needs to make it confidently.

Mortgage rates are already rising
The debate between economists matters less for borrowers right now than what has already happened to mortgage rates. Wholesale interest rates (the rates banks pay to fund their lending) have moved sharply higher on the expectation of future OCR increases, and banks have passed those costs through without waiting for the Reserve Bank to act.

ANZ raised its fixed home loan rates in mid-April, with the one-year special rate moving to 4.69% and the two-year to 5.29%. ASB lifted its two-year and three-year rates to 5.09% and 5.39%. Kiwibank, BNZ, and Westpac have all moved in the same direction.

The shape of the current yield curve is itself a signal. One-year fixed rates are sitting around 4.59-4.69%, while five-year rates range up to 5.59–6.19%. That steep upward slope reflects the market’s expectation that rates will rise meaningfully over the next few years. Banks pricing five-year money at 5.59% are telling borrowers, in effect, that they expect the average one-year rate over that period to be higher than today’s offering.

Property investors with mortgages rolling off fixed terms in the coming 12 months will need to reconsider their numbers. The low-rate environment that made the numbers work in 2025 is closing.

What this means for investors and landlords

Three things are worth taking from all of this:
• First, the floor for rates is almost certainly behind us. Whether the first hike lands in May, July, or later in the year, the direction is set. The easing cycle that brought the OCR from 5.5% to 2.25% is over. What comes next is a slow grind upward.
• Second, the magnitude matters. ANZ’s endpoint of 3% is meaningfully different from Infometrics’ 4–4.5%. The difference between those scenarios, spread across a property portfolio, is significant. Stress-test your borrowing for a world where the OCR reaches 3.5% or higher.
• Third, the inflation picture affects the whole investment thesis. If inflation stays elevated for longer, the Reserve Bank will maintain a restrictive stance for longer. That means less stimulus to the economy, more pressure on household spending, and continued softness in consumer confidence – all of which bear on rent demand, tenant quality, and capital values. The oil shock is not just a mortgage rate story.

The next OCR decision is 27 May.

If you want to talk through what rising rates mean for your investment strategy, call Goodwins on 0800 GOODWINS. We work through this with property investors every day.