New Zealand’s CPI rose 0.9% quarter-on-quarter in Q1, with annual inflation unchanged at 3.1% after 0.6% q/q and 3.1% y/y in Q4 2025. Quarter-on-quarter rises included petrol (+3.5%), pharmaceuticals (+17.7%) and confectionery (+6.2%), while international air transport fell (-7.0%) and prepaid overseas accommodation declined (-4.0%).
Non-tradeable inflation increased 1.1% q/q and 3.5% y/y, compared with 0.7% q/q and 3.5% y/y in Q4 2025. Electricity rose (+12.5%) and local authority rates increased (+8.8%).
Market moves reported were: NZX 50 up 0.13% to 12,932, NZDUSD up 0.477% to 0.5908, and the 10-year NZ government bond yield up 2.6bp to 4.617%. The NZIER Quarterly Survey of Business Opinion showed net 1% of firms expecting improved conditions in Q1, down from 39% in Q4 2025.
The report links weaker confidence to the U.S.-Israeli war with Iran, shipping restrictions in the Strait of Hormuz, and higher fuel costs. It also states expectations for a 25bp OCR hike by the RBNZ in July.
The persistent non-tradeable inflation figures have shifted our focus towards a more hawkish Reserve Bank of New Zealand. With annual inflation stuck at 3.1%, we see the market correctly pricing in the risk of a rate hike. The jump in the NZD and bond yields confirms that a July rate increase is now the base case.
In the coming weeks, we should consider positioning for higher short-term interest rates. Data from the Overnight Index Swap market now implies over an 85% probability of a 25 basis point hike by July. Paying fixed on short-term interest rate swaps or buying payer swaptions are direct ways to express this view.
The prospect of a widening rate differential with other central banks should support the New Zealand dollar. We see value in buying NZD/USD call options to capture potential upside ahead of the RBNZ’s meeting. This strategy allows us to profit from a stronger Kiwi dollar while defining our maximum risk.
However, we must watch the sharp drop in business confidence, which signals a slowing economy. We remember looking at the aggressive RBNZ tightening cycle in 2022 and 2023, where they hiked forcefully even as growth forecasts were being revised down. This history suggests the RBNZ will prioritize fighting inflation, but the risk of a policy error is increasing.
The geopolitical tensions referenced in the business survey are not just noise; they are actively driving up costs. With Brent crude futures recently trading above $105 per barrel, these imported pressures will keep inflation elevated. This reinforces the case for the RBNZ to act, despite the weak domestic economic outlook.
