Last week was all about Kiwi inflation. At 3%, Kiwi inflation has climbed back to the top of the RBNZ’s 1-to-3% target band. Over the quarter, consumer prices rose by 1%. There was little in the latest inflation report that surprised. The factors driving inflation higher, like food and administered costs, should prove temporary. While the more interest rate sensitive components of CPI, like rents and construction costs, are clearly soft. For now, we think the risk that this bout of inflation will persist is low. Because there is significant spare capacity still sloshing in the economy, and keeping downward pressure on medium-term inflation. More importantly, inflation expectations remain well anchored to the 2% target midpoint. (See our full review).

The September quarter will likely mark the peak in inflation. The current December quarter is typically the weakest quarter for inflation with seasonally weak food prices as well as the usual retail discounting into Christmas. With that in mind, we expect inflation to fall back below 3% from here. And the risks further out are still tilted to the downside.

September’s inflation report was largely in line with the RBNZ’s forecast. The move to 3% is unwanted. But inflation shouldn’t stand in the way of the RBNZ delivering further rate cuts. They should take comfort in underlying inflation, which remains subdued. Core measures of inflation strip out the volatile price movements. And encouragingly, core inflation fell from 2.7% to 2.5% - the lowest since March 2021. It is the RBNZ’s job to look through volatile movements and set policy for the medium term. And in 2026, inflation is set to slow below the mid-point of the target band (2%). We continue to expect an RBNZ rate cut to 2.25% next month.

In the world of financial markets, the shiny commodities lost some of their sparkle last week. This week, traders are back playing in the riskier corners of the sandpit as the US and China reportedly close in on a trade deal (sounds familiar…). Equities are recording record highs, again, and the Kiwi has lifted. Of course, these trade meetings have come and gone before with little to show. But there’s a bit more optimism this time around. Talks between trade officials on both sides have reportedly landed on a “very successfully framework” that’s to be discussed by President Trump and President Xi later this week in South Korea. The agenda supposedly covers everything from China’s control of rare earth metals to US’s tariffs on Chinese imports and even the fate of TikTok. Will it be a success? We’ll have to wait and see…

Amongst all this, the US government shutdown continues. At nearly four weeks, it’s the second longest shutdown in US history. And it sets the backdrop for the US Federal Reserve rate decision this week. The shutdown has delayed key data releases, including payrolls for September. Without the data, the proudly data-dependent central bank has effectively been flying blind into this rate decision. Despite this, the Fed is expected to press on and deliver a rate cut as signalled in their recent dot plot and as almost fully priced by financial markets.

Financial Markets

The comments below were provided by Kiwibank traders. Trader comments may not reflect the view of the research team.

In rates, signs of consolidation are starting to show

“Global and NZ rates are showing signs of consolidation at recent lows. Yields largely lacking daily direction given the ongoing US government shutdown. There remains approximately -40bp of cuts priced into the NZ rates curve. Ongoing lethargic data leading the market to price -25bp of that into the November meeting. Last week’s NZ CPI data release confirming high short-term inflation, with medium term expectations closer to the middle of the 1-3% range. Next up is NZ employment in early November, which although a lagging indicator is likely to paint a bleak picture.

Looking forward keep an eye on the lower NZD/TWI and inflation expectations. Mega pay induced strikes not a good indication of a rapid inflation retracement. The rollover of fixed mortgage rates is continuing and given the preference for shorter fixed rates (6m and 1 year vs 2 years) should continue at a relatively quicker pace. Offshore, four central banks meet this week. Expectations are for the FOMC and BoC to cut rates by 25bp, -24bp and -21bp priced, respectively. By contrast, the BoJ and ECB are likely to keep rates on hold.

NZ curve shape has flattened back on the back of relentless offshore receiving of the NZ mid curve (5 year). Feels like flattening trades will be the trade of 2026 assuming most central banks are at the end of their easing cycles. For NZ this may come a little earlier given the magnitude and speed of the easing cycle. The flattening trades like paying 1 year vs receiving 3 years still carry well, mostly due to the 1-year rate being lower than 3 month BKBM.” Ross Weston, Head of Balance Sheet Management– Treasury.

In currencies, trade discussions and the Fed are the guides this week

“Last week, the New Zealand dollar (NZD) regained some stability, gradually appreciating to around the 0.5750 level by week’s end, after initially fluctuating within a narrow 0.5720–0.5740 range. Monday’s domestic CPI release was broadly in line with expectations, resulting in minimal market reaction. The lack of surprise in the data maintained market pricing for a 25 basis point cut by the Reserve Bank of New Zealand (RBNZ) in November, with a further 10 basis points of easing priced in for February. The terminal rate is currently projected at 2.10% by late 2026. Meanwhile, Friday’s softer-than-expected U.S. CPI print provided reassurance to markets that the Federal Reserve is likely to proceed with a 25 basis point rate cut this week. This dovish shift in U.S. monetary policy may offer the NZD additional support in the near term, potentially guiding it toward the 0.5800–0.5850 range.

The NZD also benefited from a recovering Australian dollar (AUD), which helped lift the cross slightly. NZD/AUD appears to have found a short-term base, rebounding firmly into the 0.8800 territory after briefly dipping to 0.8786 amid renewed optimism around U.S.–China trade relations. Overall, the cross remained range-bound last week, trading between 0.8810 and 0.8845, and struggling to break through the 0.8850 level.

Softening labour market data in Australia has led to increased expectations of further monetary easing by the Reserve Bank of Australia (RBA), with a 57% probability of a rate cut in November (-14bp priced) and a cumulative -32bp priced by February 2026. In summary, recent cross-currency movements and central bank expectations suggest the NZD may have established a short-term bottom.” Mieneke Perniskie – Senior Dealer, Financial Markets.

Weekly Calendar

Domestically, the filled jobs for the month of September is due out. The data tends to be overstated in the first release, meaning we may see the 0.2% lift over August revised down. Employment growth appears to be stabilising. We may see a positive result over September.

• Across the Tasman, Aussie inflation for the September quarter and month are due out this week. The RBA will care more about the quarterly print, which is expected to jump from 2.1% to 3% with higher prices for food and electricity. The core measures however are better contained within the 2-3% target range, with expectations that it prints unchanged at 2.7%. How the underlying price pressures track will be big influence on whether or not the RBA has the green light for a cut next month. Jobs data too - released on - will also be key.

Trio of central bank announcements:

• US Federal Reserve: a lot more uncertainty clouds this decision given that the US govt shutdown has delayed a number of key data releases. The path of least regrets, however, would be to deliver a 25bps cut as signalled in the latest dot plot and as almost fully priced (96%) by markets. Recent update on inflation showed underlying price pressures as fairly muted. Core inflation rose just 0.2% in September. Benign inflation affords the Fed to focus policy on the more pertinent downside risks to employment.
• Bank of Japan: despite some hawkish commentary from officials, the policy rate is expected to remain unchanged at 0.5%. Forward guidance however will likely point toward further hikes as core inflation continues to run hot at 2.9%.
• European Central Bank: no change to the key policy rates. Instead, market participants will drill down on the accompanying commentary.

The US government shutdown continues into its third week and continues to impact data releases. Subject to a resolution in the shutdown, the preliminary read of US Q3 GDP is scheduled for release this week. Market expectations is for an annualised rate of 3%, led by strong consumer spending. That would be quite an extraordinary result given that tariffs are at their highest levels in almost a hundred years. However, that growth cannot be sustained given that hiring in the US has slowed down.

See our Weekly Calendar for more.