Westpac warns New Zealand inflation could hit 4.5% as oil shock compounds slowing growth

Key facts

• Annual CPI was 3.1% in the March quarter.
• Westpac senior economist Satish Ranchhod expects headline inflation to push towards 4.5% in mid-2026.
• BNZ chief economist Mike Jones says the economy is at 'stall-speed' rather than in recession.
• Combined services and manufacturing PMIs have slipped into contraction.
• Financial markets imply the first official cash rate increase as early as July 2026.
• Westpac expects the OCR to rise back towards neutral over 2027.
• BNZ estimates the average mortgage rate actually paid has dropped to around the mid-4% range.

Stalling growth meets resurgent inflation

New Zealand households are confronting a deteriorating economic outlook as softer growth, rising job insecurity and renewed inflation pressures converge just as markets begin pricing in higher interest rates again. Activity gauges such as the combined services and manufacturing Purchasing Managers’ Indexes have slipped into contraction, with discretionary sectors like hospitality and recreation taking a clear hit as households rein in spending. Firms are cutting back investment plans and rowing back on hiring intentions, even as net migration lifts labour supply, raising the odds of more slack in the jobs market and higher unemployment. BNZ chief economist Mike Jones says recent business and confidence surveys point to “dented growth, but still growth”, with the economy hovering around stall-speed rather than sliding into outright recession.

Oil shock reignites price pressures

Despite the softer growth pulse, both BNZ and Westpac see inflation as uncomfortably high and likely to rise further in the near term. Annual CPI stood at 3.1% in the March quarter, but fuel, transport and administered costs are moving sharply higher following the latest oil shock. Westpac senior economist Satish Ranchhod expects headline inflation to push up towards 4.5% in mid-2026, with core measures easing back only gradually over the following years. quarterly inflation was “probably not far different from aggregate wage growth”, implying flat or negative real wages and shrinking household purchasing power.

Reserve Bank faces a delicate balancing act

Ranchhod says the Reserve Bank faces “a particularly challenging balancing act”: it cannot reverse higher oil prices, but it also “can’t ignore the risk that the current oil-related rise in operating costs evolves into a more widespread and protracted lift in inflation”. The central bank must weigh the risk of stoking inflation further against the drag on growth from higher borrowing costs. The jobs market, which appeared to be stabilising prior to the Iran conflict, is now expected to come under renewed pressure as the surge in fuel prices squeezes businesses.

Mortgage rates set to grind higher

Financial markets now imply the first official cash rate increase as early as July, with several more moves over the following year. BNZ, by contrast, still sees September as the most likely starting point, while Westpac expects the OCR to rise back towards neutral over 2027. Either way, the shared message is that mortgage rates are unlikely to fall meaningfully and may grind higher again if wholesale funding costs rise. BNZ estimates the average mortgage rate actually paid has dropped to around the mid-4% range as earlier cuts flowed through, but expects that to flatten before edging up later in 2026. For homeowners who had hoped for sustained relief, the outlook is sobering: even if the OCR does not move until September, the trajectory is firmly upward.

What comes next for households and policymakers

The combination of stall-speed growth, sticky inflation and rising unemployment risk leaves New Zealand households with little room for manoeuvre. Real wages are already flat or negative, and any further increase in mortgage costs will squeeze disposable incomes further. For the Reserve Bank, the path forward is fraught with uncertainty. It must decide whether to act pre-emptively against inflation or wait for clearer signs that the oil shock is feeding through to broader price rises. Either choice carries significant economic and political consequences. As both BNZ and Westpac make clear, the era of low inflation and falling mortgage rates has given way to a more turbulent period in which the margin for policy error is razor-thin.

The bottom line

• New Zealand's economy is at stall-speed, with contraction in services and manufacturing PMIs and rising job risk.
• Inflation is set to re-accelerate towards 4.5% by mid-2026, driven by the oil shock and administered cost increases.
• The Reserve Bank faces a difficult trade-off between containing inflation and supporting growth, with no easy options.
• Mortgage rates, which had fallen to the mid-4% range, are expected to flatten and then edge higher later in 2026.
• Real wages are flat or negative, squeezing household purchasing power as the cost of living rises.
• The timing of the first OCR hike is uncertain, but markets and economists agree that rates will rise over the next year.