Inflation persists as interest rates move first: how should borrowers respond when the market is already raising rates?

A shift in New Zealand’s interest rate environment is becoming increasingly clear. The official cash rate (OCR) remains at 2.25%, suggesting no movement at the policy level. But closer to the market, interest rates are already being repriced.

Over the past week, BNZ, ANZ, Westpac and Kiwibank have successively raised fixed mortgage rates. Wholesale interest rates have risen alongside them, with the one-year swap rate climbing noticeably over a short period and its cumulative increase since the end of last year approaching 70 basis points.

Interest rates have not waited for the Reserve Bank of New Zealand.

Beneath the apparent easing in inflation

The latest data suggests inflation is returning towards the target range.

In the first quarter of 2026, annual CPI inflation was 3.1%, while core inflation measures eased to between 2.5% and 2.7%, returning to the upper end of the Reserve Bank of New Zealand’s 1%–3% target range.

But structural pressures have yet to ease significantly.

Domestic cost pressures remain strong: non-tradable inflation is holding above 3.5%, and service price inflation is easing slowly. Meanwhile, energy prices are rising again, with diesel increasing by more than 11% in a single quarter.

The greater uncertainty comes from abroad. With tensions in the Middle East continuing, energy costs are gradually feeding through transport and supply chains into prices more broadly. ASB expects annual CPI inflation could approach 4.5% around mid-year and remain above 4% throughout the year.

This means the current inflation rate may well not be the peak of this cycle.

As forecasts miss the mark, markets begin repricing

More than the inflation data itself, what is currently attracting market attention is the gap between policy assessments and actual developments.

Independent economist Tony Alexander says the Reserve Bank of New Zealand significantly underestimated the inflation path: it originally expected annual inflation of around 2.3%, compared with the reported figure of 3.1%, a discrepancy of nearly 1 percentage point within just half a year.

Within the macroeconomic policy framework, an error of this kind is more than a forecasting issue: it directly affects how much markets rely on policy forward guidance.

The consequences are gradually emerging. On one hand, markets are becoming less reliant on the official interest rate path and instead pricing rates themselves using real-time data and external variables, particularly energy prices. On the other, interest rate adjustments are happening earlier: wholesale rates and commercial banks’ mortgage rates are responding first, rather than waiting for the Reserve Bank of New Zealand to act.

The recent succession of fixed mortgage rate increases by banks directly reflects this earlier response to expectations.

Interview

The market has entered a tightening phase ahead of policy. Against this backdrop, how should borrowers interpret the current interest rate environment? We interviewed Tom Tang, founder of New Zealand United Credit and senior mortgage adviser。

Q: With CPI inflation potentially rising above 4% again and the OCR expected to increase, how do you see New Zealand’s lending market developing over the next 12 months?

Tom Tang：With oil prices rising, an increase in CPI in the second quarter is almost certain, and inflation is quite likely to exceed 4% over the full year. If you look only at the OCR, many people might think the rate-hiking phase has yet to begin, because the economy as a whole is performing poorly. But from a lending market perspective, adjustments have already begun. Wholesale rates are rising, and banks are adjusting mortgage rates. These are all responses in advance. Over the coming year, borrowing costs will most likely continue rising gradually. The changes may not be dramatic, but the direction is relatively clear.

Q: What is the biggest risk for ordinary mortgage borrowers right now?

Tom Tang：If it were just interest rates, the issue would be relatively straightforward. But the more realistic situation is that several negative factors are combining. Mortgage costs are rising while living expenses, such as food and energy, are also increasing. Unemployment remains high, wage and salary earners’ incomes have not kept pace with the price index, and businesses are not performing well either, with some even struggling to survive. Under these conditions, the pressure is amplified. So I think cash flow is what really needs attention now.

Q: Given this uncertainty, what interest rate strategy would you recommend to borrowers?

Tom Tang：At this stage, it is difficult to say any approach is the right answer. From a risk perspective, fixing portions of a loan for different terms may be relatively safe. A common approach is to fix part for a year and another part for two to three years, while keeping some on a short term or floating rate to allow room for adjustment. The focus is on controlling risk as effectively as possible rather than choosing the best rate, and on leaving yourself room to respond to change rather than trying to predict the market.

Q: Have banks already become stricter in their lending approvals? What should borrowers do to prepare?

Tom Tang：From a purely commercial perspective, banks certainly want to grow their business. Overall, though, they have become more cautious. This is not a sudden tightening, but more detailed scrutiny. They are placing greater weight on factors such as income stability, industry risks and cash flow. For borrowers, preparing in advance really means making their finances more secure, for example by controlling debt and maintaining a cash buffer.

Q: Is now a riskier time for first-home buyers to enter the market?

Tom Tang：In terms of house prices, now is indeed a good time to buy, provided you can afford it. If your circumstances are relatively stable, it could be an opportunity. But if your finances are already stretched, the risks are higher now.

Q: How will imported inflation caused by rising oil prices affect mortgage rates?

Tom Tang：Oil prices do not directly affect interest rates, but they affect inflation, which ultimately affects rates. This round looks more like a gradual transmission process: from transport costs to business costs, then to goods and services prices, before feeding into overall inflation. Its effects will therefore persist rather than being short-lived.

Q: If inflation remains stubborn and interest rates stay high for longer, how will the market change?

Tom Tang：If this continues for some time, certain pressures will inevitably emerge gradually. Some households will face greater repayment pressure, investors may leave the market, the supply of properties for sale may increase, and prices may become more volatile. Overall, however, I think a gradual adjustment is more likely than the sudden emergence of widespread risk.

What do you think?

This round of change may only just be beginning.

Is this a short-term fluctuation, or the prelude to another cycle of rate rises? Will upward pressure on interest rates ultimately feed more into house prices, or be gradually absorbed within the market? If you are making a borrowing decision, would you choose to lock in a rate now, or keep waiting?