New Zealand’s annual inflation rate fell to 3.7% in the September quarter, but economists warn the decline is temporary as rising fuel prices and a weaker dollar threaten to push it above 4% by year-end, with the Reserve Bank likely to raise interest rates again.
The consumer price index rose 0.7% in the September quarter, with annual inflation easing slightly to 3.7% from 4.1% in the June quarter, according to Stats NZ data released on October 21. However, the respite is expected to be short-lived, with core inflation measures now above 3% and analysts predicting a sharper rise in the December quarter.
Petrol Prices and Inflation: A Double-Edged Sword
Petrol prices were the largest driver of annual inflation, up 19.1% year-on-year, though they fell 6.5% in the September quarter compared to June. Petrol prices fell in the September 2026 quarter, compared with the June 2026 quarter,
said Nicola Growden, a prices and inflation spokeswoman. However, global oil prices surged in early September, pushing local pump prices to record levels and offsetting the quarterly decline.
Whatever the finer details of [the third quarter] data showed, annual inflation is already shaping up to be much stronger in the fourth quarter,
said BNZ head of research Stephen Toplis. He warned that higher fuel prices and a weaker New Zealand dollar would keep inflation elevated, with the annual rate potentially reaching 4.7% in the December quarter—a three-year high.
Economists Split on Rate Hike Timing
Most economists expect the Reserve Bank of New Zealand (RBNZ) to raise the official cash rate (OCR) by 25 basis points to 3% at its October 28 meeting, with a follow-up hike likely in December. The world is now in a very different place to what the RBNZ had anticipated, and so it should adjust accordingly,
Toplis said, citing renewed global oil price volatility and a 4% weaker New Zealand dollar compared to RBNZ assumptions.
ANZ senior economist Miles Workman noted that services inflation accelerated 0.5 percentage points to 3.1% year-on-year, while CPI excluding food, fuel, and energy rose 0.4 percentage points to 2.9%. We don’t think a hike is needed at all, to be clear,
said ASB economists Turcu and Lowe, though they warned of record high shipping costs for oil into Asia
that could pressure domestic prices.
RBNZ Faces Pressure to Act
The RBNZ’s next OCR review is on October 28, with financial markets pricing in a 25 basis point hike almost fully. The risk is being too late,
said Kiwibank chief economist Jarrod Kerr, who urged the bank to rip the Band-Aid off
and set rates at 3% immediately. Infometrics chief forecaster Gareth Kiernan argued that prolonged elevated fuel prices and a weak currency would force the bank to raise rates further, even if it risks slowing economic growth.
The RBNZ’s next inflation forecast is due in December, but chief economist Paul Conway warned of upside risk to its fourth-quarter outlook
due to oil prices and the weaker dollar. ASB economists predict annual CPI inflation will remain above 3% for most of 2027, with the rate not falling below 3% until late 2027. We see modest upside risk to our 4.5% end-of-year CPI pick,
said ASB’s Mark Smith, adding that sharp fourth-quarter increases for fuel prices, airfares, and rising construction costs are expected to push annual CPI inflation well above 4% by the end of the year.
The central bank’s decision will hinge on whether inflationary pressures persist beyond the current quarter. With petrol prices still 19% higher than a year ago and international airfares up 12.5%, the path to meeting the 1–3% inflation target remains uncertain. The [Reserve] Bank, like all of us, can see the upward pressure on inflation still to come through from higher fuel prices and a lower NZ dollar,
said BNZ’s Toplis.