Official Cash Rate maintained at 2.25 percent as inflation nears target
The Reserve Bank of New Zealand's Monetary Policy Committee held the Official Cash Rate (OCR) at 2.25 percent. Annual consumer price inflation was slightly above target at 3.1 percent, but is expected to fall to the 2 percent midpoint within 12 months.
Confidence in disinflationary path
The Monetary Policy Committee is confident that annual consumer price inflation will return to its 1 to 3 percent target band in the current quarter, falling to the 2 percent midpoint over the next 12 months.
This outlook is supported by significant spare capacity in the economy, modest wage growth, and core inflation measures remaining within the target band.
Headline inflation reached 3.1 percent in December 2025, slightly above target, primarily driven by higher tradables inflation from volatile items like food and international airfares.
These are expected to fall back due to stable import prices and a stronger New Zealand dollar.
Non-tradables inflation, particularly administered prices, has also contributed, but less inflation is anticipated in these components over the coming year.
The Committee emphasized the importance of preventing higher near-term inflation from becoming embedded in longer-run expectations, noting that long-term expectations remain close to the target midpoint.
The decision to hold the OCR at 2.25 percent reflects this confidence in the disinflationary process, with monetary policy likely to remain accommodative for some time.
Uneven recovery, balanced risks
New Zealand's economic recovery is in its early stages, broadening across sectors like manufacturing and construction, supported by strong commodity prices.
GDP grew 1.1 percent in the September quarter, though this likely overstates true momentum.
Household spending remains cautious, constrained by low employment income and falling real house prices.
The labor market, while stabilizing, retains substantial spare capacity with unemployment at 5.4 percent.
Domestic financial conditions have tightened since November, as rising wholesale interest rates have been passed on to fixed-term mortgages.
Global growth was resilient in 2025, but geopolitical developments and trade policy present ongoing uncertainties.
Risks to the inflation outlook are balanced, with potential for both slower household spending leading to undershooting the target, or firms raising prices faster than expected.
Cautious hold, not a pivot
The RBNZ's decision to hold the OCR reflects a cautious optimism, prioritizing the sustained return of inflation to target over premature tightening.
While the economic recovery is nascent and household caution persists, the Committee's confidence in disinflationary forces appears robust.
This stance signals a prolonged period of accommodative policy, balancing the risks of undershooting inflation with the potential for firms to raise prices as demand improves.