What Does New Zealand's Latest Inflation Data Mean for Interest Rates in 2026?
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Articles by Kris Pedersen.
New Zealand's inflation has come in hotter than expected, catching economists and mortgage holders off guard. The latest CPI data shows annual inflation at 3.1% for the year ending December 2025, which is above the Reserve Bank's target range and significantly higher than forecasted.
This unexpected jump has triggered a major shift in interest rate expectations, with some analysts now warning that rate hikes could arrive in 2026 rather than the cuts many borrowers were hoping for. If you're wondering what this means for your mortgage or whether now is the right time to fix your interest rate, here's what you need to know.
How did the January 2026 inflation figure compare to market expectations?
Recent expectations had shifted toward the possibility of further cash rate cuts, with some commentary suggesting the Reserve Bank could move the cash rate toward 2% at its February 18 review. However, the CPI data released on 23 January 2026 surprised to the upside, with annual inflation running at 3.1% over the 12 months to the December quarter.
Is New Zealand's inflation above the Reserve Bank's target range?
This outcome places inflation above the Reserve Bank's target range of 1–3% and above its own year-end forecast of 2.7%. Of particular note was the 0.6% increase in domestic (non-tradable) inflation, which will be a key focus for policymakers.
What's happening with housing-related inflation in New Zealand?
Cost pressures remain evident across housing-related sectors. Housing and utility expenses, including electricity, continue to rise alongside construction costs, contributing to upward price pressures in a segment that has faced ongoing challenges.
Will the Reserve Bank of New Zealand raise interest rates in 2026?
Following the cash rate cut to 2.25% in November, market expectations had been for rates to remain on hold until 2027. The latest inflation data has prompted a reassessment of this outlook, with increasing concern that rate hikes could occur during 2026.
While there remains a reasonable chance that inflation moderates to around 3% or below in upcoming quarters, the Reserve Bank is expected to take a cautious approach. Commentary is increasingly pointing to the risk of further tightening unless incoming data shows a clearer disinflationary trend.
How do Australia's inflation rates compare to NZ?
Across the ditch, the Reserve Bank of Australia has this week had to raise their cash rate with their inflation coming in at 3.8% in the year to December 2025, which is well above their target range of 2-3%.
Will rising unemployment change the Reserve Bank's focus on inflation?
On the negative side, this week we got updated numbers around employment figures with the unemployment rate jumping to 5.4%. This was higher than expected by economists and the highest since the September 2015 quarter.
While the Reserve Bank (and the National-led coalition considering it is an election year) will not want to see the unemployment rate go higher, the Reserve Bank's main focus point will be inflation.
Should I fix my mortgage rate now or wait?
In the current environment, borrowers may wish to undertake a break-even analysis before fixing mortgage rates.
How do I calculate the break-even point between 2-year and 5-year fixed rates?
Here is a simplified example, on a $100,000 loan:
• A 2-year fixed rate at 4.69% results in an interest cost of $9,380 (interest-only).
• A 5-year fixed rate at 5.69% results in an interest cost of $28,450 (interest-only).
The difference of $19,070 implies that a 3-year rate in two years' time would need to exceed approximately 6.35% for the 5-year option to be the better choice today.
While fixed rates at or above this level have been observed in recent years, they followed a period of unusually high inflation. Given ongoing uncertainty, a diversified fixing strategy across different terms may be appropriate, particularly for borrowers with higher debt exposure. Kris Pedersen Mortgages can help you with this – fill out the form here and we will be in touch.
Summary
The inflation surprise has fundamentally changed the interest rate outlook for 2026 and beyond. With the Reserve Bank now facing pressure to potentially tighten rather than ease monetary policy, mortgage holders need to carefully weigh their options. There's no one-size-fits-all answer – your best strategy depends on your loan size, risk tolerance, and financial circumstances. If you're uncertain about whether to fix now or which term suits your situation, seek a qualified mortgage broker to help you work through the numbers and make an informed decision that aligns with your goals.
You can touch base with Kris Pedersen Mortgages if you want to discuss interest rates and your personal position further – click here.
Kris Pedersen
Managing Director at Kris Pedersen Mortgages
© Gilligan Rowe & Associates LP
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Disclaimer: This article is intended to provide only a summary of the issues associated with the topics covered. It does not purport to be comprehensive nor to provide specific advice. No person should act in reliance on any statement contained within this article without first obtaining specific professional advice. If you require any further information or advice on any matter covered within this article, please contact the author.
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