Inflation genie escapes the bottle

Following the Reserve Bank’s (RBNZ) announcement today Wednesday the 8th of April that it was leaving the Official Cash Rate (OCR) unchanged at 2.25%, I thought you’d be interested in knowing what impact I see this having now on mortgage rates.

The RBNZ has stated that they are expecting inflation to go up to 4.2 percent in the June quarter and the central bank could “increase interest rates” if war in the Middle East drags on. But it says interest rates will not be changed while there is so much uncertainty and too little data. The bank is sticking to its guns that once the conflict is over inflation will return to the 2 percent mid-point within the target band of 1 to 3 percent over the medium term. The trouble with this belief is that it ignores the fact that inflation has already been increasing since March 2025 and was sitting outside target at 3.1 percent before the conflict with Iran started. Many people including myself remain concerned about underlying high inflation in New Zealand and that the Reserve Bank has underestimated the inflation risk.

Inflation has been increasing for one key reason – cost of living. Unfortunately we have a Reserve Bank monetary policy committe which doesn’t understand cost of living pressures on everyday New Zealanders hence we’ve seen recent comments made by Paul Conway RBNZ chief economist calling on Kiwi households to go spend more money in the economy. How do you feel about being told you need to spend more money? How realistic do you think that is? If you’re not having a “tell him he’s dreaming moment”, then you must be one of the few people who are already feeling the benefit of an economic recovery. What planet is Paul Conway on telling us to spend more? Because we’re doing that already. Not out of choice because we’re feeling particularly flush, but we’re spending more just to get by. Recently new numbers came out showing that grocery prices are still going up. White bread prices up 57.9 percent in the past year. Mince, that’s pink gold these days. Wellington & Porirua council rates have now more than doubled since 2012 making them the highest and least affordable in the country. Which is why this statement by the Reserve Bank’s chief economist that we need to stop being so tight and start spending more is just ridiculous.

A well-known ex bank economist recently made the comment that central banks are now biased towards driving high increases in the household cost of living (another way of describing inflation) and no longer understand how economies work. New Zealand’s inflation rate for instance, bottomed out most recently at 2.2% in the December quarter of 2024. In April 2025 Statistics NZ figures showed the rate had lifted to 2.5%. So, in May the RBNZ cut the cash rate from 3.5% to 3.25%. Then in July Stats NZ said the inflation rate had risen further to 2.7%, so the RBNZ cut the cash rate in August to 3%. In October Stats NZ figures revealed inflation had risen again to 3%. Twelve days earlier the RBNZ had cut our cash rate 0.5% to 2.5%. Knowing this rise in inflation they cut another 0.25% in November. Inflation has now climbed to 3.1%. And these people still get paid.

At the most recent RBNZ policy committee meeting one member said no signal about a rise in the cash rate from 2.25% should be given in case it made businesses think the economy would be strong and they could increase their prices. Presumably then to fight inflationary urges they should warn of rate cuts. The price for this performance displayed by the country’s central bankers is paid not by them but by Kiwi households who must live through strong increases in their cost of living. And now a new inflationary shock is running through the system. Guess who will still get paid?

Based on the above and events happening in the Middle East I expect mortgage rates to increase this year although just prior to the conflict we had seen the banks slightly reducing some of their advertised rates. At present most borrowers are electing to fix for 2 or 3 years. I believe that this strategy makes good sense given the likely direction that mortgage rates are expected to take. Ultimately as a borrower you need to decide what fixed term is best for you based on your own financial circumstances.

My earlier prediction for when the Reserve Bank will likely be forced to increase the OCR stands. This means we could see an increase happening as early as the 27th of May, this been the OCR review date following the next CPI/inflation data due from Stats NZ on the 21st of April. With inflation already sitting outside target if the inflation data due later this month doesn’t show improvement, Governor Breman will need to act given her repeated statements about been “laser focused” on combating inflation. The RBNZ cannot now use the war in the Middle East as a scapegoat to explain why inflation is not falling. Yes, the conflict is inflationary but it’s not the core reason for high increases in household cost of living here in New Zealand. The inflation genie needs to be put back in its bottle and traditionally this is not easy to do quickly.

Looking briefly at the state of New Zealand’s housing market the latest feedback from land agents surveyed shows for the third time since early-2023 an upturn in the residential real estate market has paused then gone into reverse. Agents see prices as currently falling in their areas with fewer people attending open homes and auctions. Buyers are newly worried about employment and interest rates but have few concerns about listings or access to finance. It remains a buyers’ market.

Please let me know if you would like to discuss the current mortgage rate that you are on with your bank or are needing assistance with finance to purchase a new property or to refinance.

Kind Regards

Simon