Welcome back. Last year was a tough one for many Kiwi households and businesses. But 2026 should be a better year. Our economic recovery started to take shape toward the tail end of ‘25. But this year should see that recovery gather pace. We’re growing in confidence as interest rates have been (belatedly) set at stimulatory levels. And we’re hearing more from investors, after a few years of conspicuous absence. Household budgets are improving, with growing appetite for discretionary spend. That’s a good sign. Business confidence continues to strengthen – another good sign. Even better is the reported lift in activity. It’s not just confidence, it’s action – see the COTW below for a roundup of the NZIER business confidence survey.

Offshore developments and news since the start of the year, however, remind us of the risks we still face. Political tensions both within and across borders have been flaring up. For now, financial markets remain undisturbed. In fact, the VIX (indicator of market volatility) is signalling “normal” conditions. There’s no telling what economic shock we’ll get this year. But a stronger domestic economy will no doubt build our resilience. Encouragingly, we are on the road to recovery.

Kicking back into the data, this Friday we’ll get our hands on inflation. By our calculations, inflation looks to have lingered at the top of the RBNZ’s 1-3% target band. We expect prices rose 0.5% over the December quarter, keeping the annual rate at 3%. While such a read would top the RBNZ’s 2.7% forecast, we don’t expect the overshoot to set off any alarm bells at the Reserve Bank. Continued strength in imported inflation, exacerbated by a weaker Kiwi dollar, is the main culprit. And we’ve seen increases in some of the more volatile and seasonal prices, including petrol, airfares, and accommodation. We’re expecting tradable inflation to have lifted 2.4% over the year. Domestic price pressures, however, continue to cool given excess capacity in the economy. We expect non-tradables inflation eased to 3.3% from 3.5%. And we expect core measures of underlying inflation to continue following the same downward path.

The December quarter is typically the weakest quarter for inflation. Food prices are seasonally soft, and the holiday period sees the usual round of retail discounting. Monthly price data showed food prices fell 0.8% over the final quarter of the year. Meanwhile, rents remain weak, rising just 0.1% over the quarter - the softest increase since StatsNZ has been collecting the data (1999). There was also more relief on the household budget when it came to electricity charges. According to StatsNZ, prices rose 1.3%, better than the 3.2% increase over the September quarter, but still 11.3% up on the year.

So what’s keeping inflation at the top of the RBNZ’s target band? It’s largely due to the continued rise in imported inflation. Since hitting a low of -1.6% in September 2024, tradable inflation has been steadily climbing. Two years later, the annual rate reached the highest since late 2023 at 2.2%. And we expect Friday’s data to show a further rise to 2.4%. A key driver appears to be the 2.5% increase in petrol prices at the pump. Diesel was up 4%. Global oil prices were lower over the quarter, but so too was the Kiwi dollar. The NZ TWI dropped 0.8%. Another hot spot within transport was airfares. Domestic airfares jumped 3.7% over the quarter, while international airfares jolted 7.2%.

A weaker currency raises the cost of bringing in goods from overseas, and is another likely driver behind the reacceleration in tradables inflation. However, the impact of a weaker currency on retail goods has proven limited. According to recent business surveys, it is the ongoing weakness in demand that is having the greatest impact on price-setting behaviour. We’re expecting inflation among retail goods like clothing and footwear as well as household contents to come in soft.

Accommodation services is another volatile item within the CPI basket, and likely another key driver for a strong quarter for inflation. Preliminary data reports an 8.8% increase in domestic accommodation prices, and a 2% increase in overseas accommodation prepaid in NZ.

All in all, while Friday’s release will show some annoying hot spots of lingering inflationary pressures the underlying trend should still be one of disinflation. Spare capacity still teeming in the Kiwi economy should see further generalised cooling in domestic inflation over the medium term. While a forecast recovery in the Kiwi dollar this year should relieve some of the offshore inflationary pressures. Put together we continue to expect inflation to fall back to the RBNZ's 2% mid-point over 2026.

Financial Markets

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

In rates, the RBNZ's circuit breaking easing takes affect

“Kiwi rates have had a choppy start to the year, with the first full week delivering a modest move higher. The QSBO, PMI, and SBI all reinforced that the circuit breaking -75bp of cuts late last year achieved the intended stabilisation. The challenge for the rates market, however, is that much of this improvement was already priced, with around +30bp of hikes priced in by year end. That has now stretched to roughly +35bp, including +6bp priced for July. This is a natural response to meaningfully stronger data, with inflation holding near 3.0% being the key sticking point. It leaves the RBNZ in a difficult position, as wholesale rates have the potential to rapidly unwind much of the Q4 2025 easing if not carefully managed.

The curve flattened sharply last week as spreads widened against Australian equivalents, pulling long end Kiwi yields (10 years) lower and extending the recent flattening trend. Overall, long end yields are trading cautiously to start the year, influenced by geopolitical tensions and ongoing debate about measures to suppress long end rates outside of Federal Reserve policy.

At the front of the curve, Kiwi short end rates should maintain upward momentum as long as data remains firm, with this week’s CPI release expected to reinforce that dynamic. While most market commentators currently project no RBNZ OCR hikes in 2026, the risk is that these forecasts begin to converge with market pricing, which now implies at least one +25bp hike toward year end.” Ross Weston, Head of Balance Sheet Management – Treasury.

In currencies, geopolitics may start to rock the boat

“The start of the year has brought a fresh round of increased geopolitical concerns, but so far the Kiwi dollar has held up relatively well. Prior to the summer break, the Kiwi was trading close to 0.5820/0.5850, but it has fallen back into the lower 0.5720/0.5750 levels over the past couple of weeks. The US dollar has traded higher, with the Dollar index (DXY) back at 99.30. The US dollar has been lifted in part on the back of expectations that the Federal Reserve are unlikely to deliver further cuts until later in the year. US data prints, especially on the labour market, have caused no major alarm bells that would prompt the Fed to cut rates any earlier. Over the weekend geopolitical and trade tensions increased again, with Trump announcing further tariffs on 8 NATO allies supporting Denmark, that won’t comply with the US plan to ‘own’ Greenland. In early trading this morning the Pound and Euro are slightly weaker vs the US dollar. We may see some of this flow through to other currencies, but so far the Kiwi and Aussie dollars are holding steady. The NZDAUD cross has also traded lower to start the year, back to 0.8610 from the low 0.8700’s prior to Christmas. The NZDAUD cross may head a touch lower this week, with the Aussie dollar usually outperforming the Kiwi dollar when commodity prices (especially Gold) increase. On the local data front this week, the NZ CPI print for Q4 is released on Friday. On the global data front, the World Economic Forums will hold their annual meeting in Davos this week, which will include a meeting between Trump and NATO leader Mark Rutte. ” Mieneke Perniskie – Senior Dealer, Financial Markets.

Weekly Calendar

• Locally, the first key data print is due out. On Friday, the consumer price index data for the December 2025 quarter will be released. Market consensus is for a 0.4% lift in prices over the quarter, with the annual rate dropping a touch to 2.9% from 3%. Our estimate is slightly stronger, with expectations for an unchanged annual rate. see above for our preview.
• Across the ditch, Aussie jobs data is due for the month of December is due out. Following a surprisingly soft November outturn, December is expected to show solid jobs growth of 27k. But with gains in labour supply exceeding employment growth, the unemployment rate is expected to lift slightly to 4.4% from 4.3%.
• The Bank of Japan will announce its latest monetary policy decision this week. The BoJ is expected to keep policy unchanged after hiking interest rates in December. The path remains towards tightening. On the data front, Japan inflation is due out. Headline is expected to show a cooling in price growth. But core measures of inflation should provide evidence of a passthrough of higher labour costs. A solid underlying trend in inflation should give the BoJ confidence to maintain a tightening bias.
• UK CPI is due out this week, and expected to have climbed in December. Headline inflation is picked to rise to 3.3%yoy, up from 3.2% and driven mostly by a rise in tobacco duty and higher airfares. The acceleration is expected by most forecasters, including the BoE, and should prove temporary as the big increase in prices over 2025 fall out of the calculations. UK labour market data is also due out this week and expected to show further cooling in market conditions. Pay growth is expected to slow to 3.7%yoy from 3.9%yoy, while the unemployment rate is picked to remain elevated at 5.1%.
• In Europe more broadly, the ECB's December meeting minutes will capture market attention. As a reminder, the ECB upgraded its inflation forecasts, removing the need for further policy easing.

See our "Weekly Calendar" for more.