NZ inflation expectations mixed ahead of likely RBNZ on hold decision February 18

RBNZ set to hold at 2.25% as inflation expectations send mixed signals and hike bets build for 2026.

Summary:

• RBNZ widely expected to hold OCR at 2.25% on February 18

• Inflation at 3.1%, above 1–3% target band

• Rate cuts since 2024 total 325bp

• Hike expectations for end-2026 rising

• Futures price ~60% chance of hike by Q3 end

• 2-yr inflation expectations ease to 2.4%

• 1-yr expectations tick up to 2.6%

The Reserve Bank of New Zealand is widely expected to leave its official cash rate unchanged at 2.25% at its February 18 meeting, with all 31 economists in a Reuters poll forecasting a hold. After aggressively cutting rates by a cumulative 325 basis points since August 2024 to counter recessionary pressures, policymakers now appear set to pause and assess how inflation and growth evolve.

Inflation rose to 3.1% in the latest quarterly reading, moving just above the RBNZ’s 1–3% target band and marking its highest level in over a year. At the same time, the economy returned to growth in the third quarter following a prolonged contraction, reinforcing the case for a wait-and-see approach.

While consensus sees no immediate move, the debate has shifted toward when tightening might resume. Around 45% of economists surveyed now expect at least one rate hike by the end of 2026, a notable increase from late last year. Futures markets are even more assertive, pricing roughly a 60% probability of a 25bp or larger hike by the end of the third quarter.

Recent RBNZ inflation expectations data adds nuance to the outlook. One-year expectations edged up to 2.6% from 2.4%, while two-year expectations — closely watched by policymakers — eased to 2.4% from 2.6%. The moderation in the two-year measure may offer some reassurance that medium-term inflation pressures remain contained, even as short-term expectations firm.

Some economists caution that talk of renewed tightening may be premature. While activity data has surprised to the upside, they argue the recovery remains tentative and that inflation pressures are not yet clearly demand-driven.

The upcoming decision is therefore likely to emphasise optionality: holding steady for now, while keeping the door open to future tightening should inflation prove persistent.