Forecasters at Westpac New Zealand have updated their inflation outlook, projecting that the annual rate will reach its highest point in three years during the final quarter of 2026, with elevated global fuel costs and a weaker local currency identified as the principal contributing factors.

New Zealand's annual price growth climbed to 4.1% over the June quarter, according to the Consumers Price Index compiled by Statistics NZ — a level not reached since the 4.7% recorded in the December 2023 quarter. Westpac NZ has put the September quarter increase in consumer prices at 0.7%, ahead of the official CPI reading scheduled for release on October 22.

Analysts have questioned whether the easing in annual inflation — tipped to come in at 3.7% for the year to September, against 4.1% for the year to June — will endure, given that the conditions driving the slowdown are seen as temporary.

Westpac NZ chief economist Kelly Eckhold put the anticipated rise in consumer prices at 1.1% across the December quarter. Annual inflation, according to forecasters, is headed toward 4.2% by year's end — a rate last recorded three years ago — with the revision upward tied to two converging pressures: a run-up in fuel prices on world markets and a slide of more than 4% in the value of the New Zealand dollar dating back to early September.

Eckhold noted that those combined factors had driven pump prices for 91 unleaded up by roughly 50 cents per litre over the preceding month, with the national average hitting $3.53 per litre in the days before the statement was made.

A comparison of forecasts reveals that the RBNZ's own December quarter projections run above the inflation outlook Westpac NZ has separately put forward. In its September Monetary Policy Statement, the Reserve Bank of New Zealand trimmed its annual CPI forecasts for both the September and December quarters to 3.9%, pulling back from the 4.3% and 4.1% projections it had set out in the May MPS.

Eckhold reported that, during a presentation delivered in Dunedin, RBNZ Governor Anna Breman identified upward pressure on the central bank's near-term inflation projections stemming from rising oil prices, while also pointing to the medium-term outlook as the institution's primary area of attention. Quarterly inflation projections for 2027 remain unaltered at this point in time.

The upward revision to the December quarter forecast, Eckhold noted, points to annual inflation holding at elevated levels through most of 2027 — a trajectory that aligns with projections published by the RBNZ. Statistics NZ's monthly prices publication, covering the September quarter and due out on 16 October, will provide the data against which Westpac NZ's inflation projections can be measured.

Transaction volumes had been sliding and properties were taking around 48 days to find buyers — longer than Westpac NZ had projected for the latter half of 2026 — and Eckhold pointed to that drawn-out sales pace as a factor pulling average house prices gradually lower, though areas with stronger ties to export activity, mostly across the South Island, had held their ground more than elsewhere.

Eckhold noted that available data pointed to no near-term shift in the direction of that trend, adding that the weakness reflected in those figures had rendered the earlier projection of broadly stable house prices through the September and December quarters more optimistic than conditions now warranted.

Eckhold noted that the institution had revised its national house price projection for 2026 from a year-on-year gain of 0.6% to a year-on-year contraction of 1.4%, a shift he attributed to anticipated quarterly price declines of 0.5% in the September quarter and 0.8% in the December quarter, with subdued employment conditions, elevated mortgage rates, and modest jobs growth all pointing toward continued softness in the housing market over the period ahead.

Downside factors are projected to persist into 2027, leaving the outlook for that year uncertain. Eckhold noted that scenario would become more likely if the 2026 general election were to produce a government that moved to raise the tax burden on capital gains derived from investment properties.

Westpac NZ's projections for the Official Cash Rate have held steady, with no adjustments made to the bank's existing outlook. The bank's forecast places an OCR hold at the 28 October review, with a lift to 3% pencilled in for the Monetary Policy Statement scheduled for release on 9 December. A rate of 2.75% applies to the OCR at present.

Eckhold noted that, with the RBNZ's estimated neutral rate of 3% — the threshold at which monetary settings are neither stimulatory nor contractionary — drawing closer, Westpac NZ had been anticipating a slower pace of OCR increases from the central bank following its July move. Tasked with holding inflation between 1% and 3% — with a midpoint target of 2% — the RBNZ adjusts the OCR as its primary lever for maintaining price stability.

The Reserve Bank's Monetary Policy Committee assesses the OCR on eight scheduled occasions each year, adjusting its approach as economic conditions evolve, and one analyst view holds that the RBNZ is likely to face further policy work before 2027 draws to a close. Eckhold noted that rate adjustments carried out so far — along with a further move anticipated in December — would leave the MPC in a position to respond to whatever conditions take shape in 2027, though a considerable amount remained to be resolved before that point.

Over roughly the past six weeks, a climb in long-term interest rates has drawn monetary conditions tighter, a shift that analysts say has broadly cancelled out the loosening effect that a weaker exchange rate brought over the same span.