Monetary Policy Statement February 2026

Policy assessment

OCR on hold at 2.25% with inflation expected to fall

Annual consumers price inflation was slightly above the Monetary Policy Committee’s 1 to 3 percent target band at the end of 2025. Increases in food and electricity prices and local council rates were the biggest contributors to above-target inflation.

The economy is at an early stage in its recovery. With ongoing strength in commodity prices, economic activity in the agricultural sector and regional New Zealand remains strong. Although residential and business investment is increasing, households remain cautious in their spending. The labour market is stabilising, but unemployment remains elevated. House price growth remains weak, dampening household wealth and inclination to spend.

In response to previous cuts in the OCR, economic growth is broadening across sectors of the economy, such as manufacturing, construction and some retail. Economic growth is expected to increase over 2026.

Inflation is most likely returning to within the Committee’s 1 to 3 percent target band in the current quarter. The Committee is confident that inflation will fall to the 2 percent midpoint over the next 12 months due to spare capacity in the economy, modest wage growth, and core inflation within the target band.

Risks to the inflation outlook are balanced. The global environment remains highly uncertain. Domestically, greater caution by households in their spending decisions could slow the pace of New Zealand’s economic recovery, risking inflation falling below the target midpoint. But with demand increasing in the economy, businesses could try to increase prices faster than expected, leaving inflation above the target midpoint.

The Committee agreed to hold the OCR at 2.25 percent. If the economy evolves as expected, monetary policy is likely to remain accommodative for some time. The Committee will continue to assess incoming data carefully. As the recovery strengthens and inflation falls sustainably towards the target midpoint, monetary policy settings will gradually normalise.

Anna Breman
Governor

1. Summary record of meeting

A significant easing in monetary policy since August 2024 is supporting a recovery in economic activity. Annual consumers price inflation increased to 3.1 percent in the December 2025 quarter, slightly above the Monetary Policy Committee’s 1 to 3 percent target range. The Committee is confident, however, that with significant excess capacity in the economy, inflation will fall to around the mid-point of the target range over the next 12 months.

Headline inflation is expected to fall to near the mid-point of the target band

The Committee noted that headline inflation is most likely returning to the target band in the March 2026 quarter. Recent increases in inflation have been driven by higher tradables inflation, partly due to larger increases in volatile items such as food, international airfares, and overseas accommodation. Tradables inflation is expected to fall back over the next 12 months due to relatively stable import prices and some support from the recent appreciation in the New Zealand dollar.

Inflation has also been held up by some components of non-tradables inflation that are less sensitive to monetary policy, particularly administered prices. These are prices that are set or heavily influenced by central or local government. Inflation in these components has been due to a lagged response to previous high inflation and a range of structural factors. The Committee expects there to be less inflation in some administered prices over the coming year, such as electricity lines fees, university fees and vehicle licensing fees.

Components of the non-tradables basket that are sensitive to monetary policy have declined to around historic average levels. Measures of core inflation have remained stable, albeit mostly above the target midpoint. Rates of wage inflation remain consistent with inflation trending back towards 2 percent.

The Committee emphasised the importance that higher near-term inflation not become embedded in longer-run expectations. Inflation expectations for professional forecasters and business leaders increased slightly across all tenors, but long-term expectations remain close to the target mid-point. Inflation expectations of households have continued to decline from elevated levels.

Significant spare capacity remains

The Committee noted that there is still significant spare capacity in the economy. The output gap is estimated to be -1.5 percent of potential GDP in the December 2025 quarter.

Spare capacity in the labour market is substantial but stabilising. While the unemployment rate increased to 5.4 percent, key measures of employment strengthened over the December quarter. The labour market is expected to continue to strengthen as the nascent recovery in economic activity broadens through 2026.

Continued spare capacity, subdued wage growth and measures of core inflation within the target band provide the Committee with confidence that the conditions are in place to return and sustain inflation at 2 percent over the medium term.

Economic activity is now recovering

Economic activity began recovering over the second half of last year in response to strong export prices and supportive monetary policy settings. GDP increased by 1.1 percent in the September quarter, after falling 1.0 percent in the June quarter. The Committee noted that measured GDP data has been more volatile than usual, in part due to a range of temporary factors and measurement issues.

There are signs that the recovery is broadening across the economy, although the September quarter GDP likely overstates the true level of momentum in the economy. Residential and business investment both increased from low levels, and measures of investment intentions and building consent issuance have all increased. More timely measures of economic activity such as the QSBO, PMI, and PSI suggest that growth has been maintained in 2025Q4 and 2026Q1.

The economic recovery has been uneven across sectors and regions. Stronger activity has been observed in the rural economy and in the primary sector. Consumer spending has been constrained by low growth in employment income and the negative effect of falling real house prices on household wealth.

House prices have continued to edge downwards despite lower mortgage rates and a modest pick-up in housing market activity. This possibly reflects weak population growth and elevated long-term interest rates. House price growth is expected to gradually increase over 2026 and then grow at around the rate of household income growth over the medium term.

Household consumption is projected to increase over the medium term as past reductions in the Official Cash Rate (OCR) continue to support demand. The Committee noted that labour market conditions are likely to become more important relative to house prices in influencing consumption.

Government expenditure is assumed to grow at a subdued pace over the medium term, consistent with the Half Year Economic and Fiscal Update 2025 projections.

Domestic financial conditions have tightened since November

The New Zealand dollar Trade Weighted Index has appreciated, reflecting higher domestic interest rates and a weakening US dollar. Wholesale interest rates beyond 12 months have increased due to higher global interest rates and investor expectations of future increases in the OCR. Banks have passed these increases through to fixed-term mortgage rates.

The flow of mortgage borrowing priced in the 1–2-year terms increased substantially since November. While the average mortgage rate has declined to 5.1 percent, further downward adjustments are expected to be less than assumed in November.

Global growth has been resilient but risks remain high

The Committee noted that the global economy was more resilient than expected in 2025. Tariffs have had less impact on global growth than previously expected, while strong investment in artificial intelligence technology has supported exports from our trading partners in Asia. Expansionary fiscal policy has also supported growth in a number of economies. The Committee continues to expect trade barriers to present a headwind to growth, with trading partner growth expected to weaken slightly over 2026.

On a trade-weighted basis, global inflation has declined, but there has been significant divergence across countries. Tariff policies have increased inflation pressure in some economies such as the US, but these have been offset by disinflationary pressure in China and the broader Asia region.

Geopolitical developments over recent months have led to continued high economic uncertainty and financial market volatility. The US dollar has declined, while the prices of oil and precious metals have risen, along with sovereign bond term premia.

The domestic financial system remains stable

The Committee was briefed on financial system stability. Measures of domestic financial stress have eased as lower interest rates reduce debt servicing pressures. Non-performing housing loans have also declined, and banks expect further reductions in housing and commercial property impairments over 2026. The Committee agreed that there is currently no material trade-off between meeting its inflation objectives and maintaining financial system stability.

Risks to the outlook for inflation are balanced

There are upside and downside risks to the near-term outlook for inflation. The Committee noted the contribution that administered price inflation had played in recent inflation outturns and the risk that this could remain high for longer than currently assumed. Conversely, the Committee discussed the risk that volatile components of tradable inflation could fall more rapidly.

The Committee discussed the risks around firms’ price-setting behaviour. While weak demand has constrained the ability of firms to pass on higher costs, the Committee noted the risk that changing price setting behaviour could result in higher inflation. In this context the Committee also discussed the risk that the output gap could be smaller than currently estimated, accentuating the risk that firms raise prices as demand improves. This could lead to more persistence in domestically generated inflation pressure that would require tighter monetary policy than otherwise.

Members noted risks regarding the speed of the economic recovery. The Committee noted the risk that household spending could be slower to recover than currently assumed, particularly if house price growth remains subdued. This could lead to households continuing to maintain higher levels of precautionary saving. Conversely members noted a risk that higher export incomes and the return of capital to dairy farmers from the sale of Fonterra’s consumer brands business could spur higher investment and consumer spending by farmers.

The global outlook is uncertain

The Committee noted that the global economic outlook continues to be highly uncertain. In the near-term, key uncertainties relate to the direction of global trade policy, market valuations of artificial intelligence investment and geopolitical tensions. Downside risks remain to growth in China as policy makers attempt to maintain growth targets in the face of weak domestic demand. Continued excess capacity and subdued demand in China could create greater disinflationary pressure.

Over the longer term, the Committee noted risks associated with unsustainable fiscal dynamics in several countries. This could put ongoing pressure on central bank independence and create conditions for more persistent global inflation. This could lead to higher long-term global real interest rates and create risks to global financial stability.

The Committee reached consensus to hold the OCR at 2.25 percent

The Committee discussed the monetary conditions required to achieve their medium-term inflation mandate.

The Committee agreed that the economic recovery remains nascent, and a premature normalisation of monetary conditions could dampen the recovery and lead inflation to undershoot the target. The Committee also considered the risk that policy remains accommodative for too long, leading inflation to persist above the mid-point of the target range for longer.

Members agreed that the monetary policy stance would need to remain accommodative for some time to support a sustained recovery in economic activity. There is a risk that prolonged caution on the part of households could slow the recovery in consumption activity, particularly in the context of a recent tightening in financial conditions. Members also noted global risks that could slow domestic economic recovery. Significant excess capacity, modest wage growth, and core inflation within the target band provides confidence that inflation will return to the midpoint of the target band.

Members noted the risk of inflation remaining more persistent, given surveys showing somewhat elevated inflation expectations and business pricing intentions. One member supported maintaining the OCR at current levels for now but noted that if economic activity recovers as expected, monetary stimulus could begin to be withdrawn somewhat earlier without compromising the economic recovery. Another member noted that responding too quickly to firms’ pricing intentions could reinforce perceptions of strong demand and encourage firms to align on further price increases.

On Wednesday 18 February the Committee reached consensus to hold the OCR at 2.25 percent. The forward OCR path reflects a somewhat stronger economic outlook and balanced risks to inflation.

If the economy evolves as expected, monetary policy is likely to remain accommodative for some time. The Committee will continue to assess incoming data carefully. As the recovery strengthens and inflation falls sustainably towards the target midpoint, monetary policy settings will gradually normalise.

Attendees:

MPC members:Anna Breman (Chair), Carl Hansen, Hayley Gourley, Karen Silk, Paul Conway, Prasanna Gai

Treasury Observer: Struan Little

MPC Secretary: Chris Bloor

Trading-partner growth is expected to decrease slightly in 2026. Trade barriers and geopolitical uncertainty are still expected to present headwinds to global growth. Bloomberg consensus forecasts project that annual New Zealand trade-weighted global growth will slow to 2.9 percent in 2026, close to historical average growth rates.

Geopolitical and policy uncertainty has contributed to volatility in global financial markets since the November Statement. Rising geopolitical tensions and extensive protests in Iran have contributed to higher global oil prices since January. In government bond markets, term premia have increased. Higher term premia may reflect investor concerns about debt sustainability, economic volatility, and central bank independence. These concerns have also had an influence in currency markets. The US dollar index has depreciated about 3 percent since the November Statement. Weakness in the US dollar and Japanese yen and increases in New Zealand interest rates have led the New Zealand dollar to appreciate since the November Statement.

Trading partner inflation is projected to stabilise around 2 percent next year (figure 2.4). Annual New Zealand trade-weighted global inflation declined to 1.8 percent in 2025. Trends in inflationary pressure are diverging across our major trading partners. Inflation has remained low in emerging Asia, and very low in China. Inflation in the US is above target, but has continued to ease gradually despite some tariff-related price increases. Meanwhile, inflation in Australia has increased and is above the target range.

Over time, recovering economic activity will support growth in employment and a reduction in spare capacity in the labour market. Measures of labour market slack tend to lag broader measures of spare capacity and estimates of the output gap. Employment is expected to increase with a delay as economic activity increases, as firms may initially choose to offer more hours to existing workers to meet increasing demand, rather than hiring more workers. The projected decline in the unemployment rate is even more gradual, as greater employment opportunities are assumed to encourage more people to enter the labour force.

Spare capacity is contributing to slower nominal wage inflation. Wage inflation has declined substantially since its peak in 2023. Annual wage inflation, as measured by the labour cost index (LCI, ordinary and overtime, private sector) declined to 2.0 percent in the December 2025 quarter, consistent with the November Statement projection. Wage inflation is assumed to remain around its current level over the medium term (figure 2.13). Slower wage inflation represents smaller cost increases for businesses and will help to reduce domestic inflationary pressure.

All measures of core inflation remain within the target range, but most are above the target mid-point. Core inflation measures use a variety of approaches to strip away temporary or volatile components of inflation, to give a sense of underlying inflationary pressure. They tend to be a better predictor of future inflation than the headline number. Movements across different annual core inflation measures were mixed in the December 2025 quarter, with some increasing and others decreasing. All measures remain within the 1 to 3 percent target range. However, the average of the five main measures we monitor remains above the target mid-point at 2.4 percent. Further declines in core inflation will be necessary to see inflation settle sustainably near 2 percent.

Annual non-tradables inflation remained at 3.5 percent in the December 2025 quarter (figure 2.15). This was stronger than expected in the November Statement. Inflation in sectors most sensitive to monetary policy, such as new housing construction, remains below historic averages. However, inflation in administered prices, such as electricity and local council rates, has remained elevated and is contributing significantly to non-tradables inflation.²  Inflation increased in the December 2025 quarter in some more volatile non-tradables components, such as domestic airfares and accommodation.

Annual tradables inflation increased to 2.6 percent. This was above our November Statement forecast of 2.0 percent. Much of the increase in tradables inflation was accounted for by international air transport and fuel prices, both of which are highly volatile components. However, there were also increases across a broad range of tradables items.

The depreciation in the New Zealand dollar exchange rate over 2025 likely contributed to stronger tradables inflation in the December quarter. Annual food price inflation declined in the December quarter and is expected to reduce further in the near term.

Inflation is projected to return to the target range in the March 2026 quarter (see chapter 4). Some significant one-off price changes during 2025 will fall out of the annual calculation in the coming year. For example, effective from 1 January 2025, the Government replaced the first-year Fees Free scheme with a final-year Fees Free policy, meaning that neither scheme applied to university fees due in 2025. That one-off increase in measured university fees will not be repeated in 2026 and will partially reverse as students under the new scheme reach their final year of study. Electricity lines charges increased significantly in April 2025. These charges are scheduled to increase further in each of the next few years, but by a smaller amount.

The effects of past high inflation continue to influence price-setting behaviour. In our Survey of Expectations, inflation expectations of professional forecasters and business leaders increased at all horizons (figure 2.16). In the Tara-ā-Umanga — Business Expectations Survey, which is based on a much larger and more representative sample of New Zealand businesses, inflation expectations have increased at the one- and two-years-ahead horizons but declined five years and ten years ahead. In the Tara-ā-Whare — Household Expectations Survey, inflation expectations declined (figure 2.17). One-year ahead household expectations remain elevated relative to history. Higher inflation expectations are consistent with higher experienced inflation, especially at shorter horizons (see chapter 4.2 in the August 2025 Statement). This can make inflation more persistent, and means, all else equal, that tighter monetary policy is required to ensure price stability in the medium term.

Spare capacity will continue to reduce underlying inflationary pressures and non-tradables inflation. Headline inflation is projected to converge to near the 2 percent target mid-point over the next year, as some one-off price increases drop out of the annual calculation, tradables inflation declines, and spare capacity and lower wage growth continue to moderate domestic price pressures. Over the medium term, price-setting behaviour is assumed to normalise as households and business continue to adapt to a low-inflation environment. This will enable continued economic growth and a reduction in spare capacity without upward pressure on inflation.

Monetary policy outlook

Conditional on the central economic outlook, we project that the OCR will remain around its current level in the near term, before gradually increasing from late 2026 (figure 2.18). We assume price-setting behaviour will continue to adapt to a low-inflation environment, easing inflationary pressure. We also expect that past reductions in the OCR will support an ongoing recovery in domestic activity and a reduction in spare capacity over time. As the economy recovers, the MPC expects to increase the OCR gradually as necessary to contain inflationary pressure and ensure that inflation settles sustainably near the target mid-point.

Compared to the November Statement, the OCR is projected to increase slightly sooner. This reflects modestly more persistent inflationary pressure than previously assumed, and increasing confidence that economic growth will continue.

Policy rate expectations and short-term bond yields have increased across jurisdictions. A slightly stronger economic outlook since the November Statement has put upward pressure on short-term yields. This has been largest in Australia, Japan and New Zealand, with smaller increases across other jurisdictions.

Longer-term bond yields have increased in most of our trading partners since the November Statement. This is most notable in Japan, where Prime Minister Takaichi’s proposal for increased fiscal spending and a general election in early February heightened concerns for Japan’s debt sustainability and inflation outlook. Changes elsewhere have been more moderate as term premia, which reflect the additional compensation demanded by investors for holding long-term assets, have continued to increase.

Policy uncertainty and changes in near-term monetary policy expectations have driven moves in currency markets. The US dollar index is down 2.75 percent since the November Statement (figure 3.4). This reflects a similar dynamic that contributed to the US dollar depreciating after tariffs were announced in early April 2025, when investors became more cautious about their exposure to US dollars.

The Japanese yen has also depreciated materially and is now around 9 percent weaker on a trade-weighted basis than in mid-2025, driven by expectations of expansionary fiscal policy amidst already high debt levels and inflation. The Australian dollar has appreciated significantly due to expectations for higher policy rates.

Global equity prices have continued their upward trend despite concerns about heightened geopolitical risk (figure 3.5). The MSCI World Index has increased 4.5 percent since the November Statement, despite some periods of short-lived declines in risk appetite in response to recent geopolitical events and AI-related uncertainty. Japanese equity prices have been particularly strong over this period due to expectations for additional fiscal stimulus, yen depreciation and rising inflation expectations, with the TOPIX increasing 15.7 percent since the November Statement. Although the US S&P 500 was higher over the same time period, prices in the technology sector have been volatile and have declined since the November Statement. These moves have come in response to concerns over future corporate earnings in AI-exposed companies, and more recent fears that software companies could be affected by increased AI integration.

Recent longer-term mortgage fixing by households may have resulted in higher-than-otherwise swap rates since the November Statement. In addition to financial markets participants’ expectations for the OCR, swap rates are likely to have been affected by longer-term mortgage-fixing behaviour in recent months. This is because commercial banks hedge the interest rate risk of a fixed-term mortgage.³  Increased demand by commercial banks to hedge interest rate risk in the swap market can push swap rates higher. This effect can be larger in December and January, when liquidity in the swap market can be lower than usual.

A larger share of new mortgage lending was fixed for longer terms in December, which may have put further upward pressure on swap rates. In November, almost half of new mortgage lending had been set on floating mortgage rates, likely reflecting household expectations for lower mortgage rates after the November Statement (figure 3.8). The share of new mortgage lending being fixed for at least one year increased from around 40 percent in November to around 70 percent in December, likely due to households deciding to fix for longer terms in anticipation of higher interest rates in the future. Market participants reported that mortgage hedging demand had contributed to higher swap rates since the November Statement.

Annual non-tradables inflation continued to decline in 2025, albeit more gradually than we had initially expected. Significant spare capacity and price-setting behaviour adjusting to a low-inflation environment continued to reduce inflationary pressure. However, the decline was slower than expected, partly due to historically high inflation in administered prices. Administered prices refers to prices set or heavily influenced by central or local government.

Administered price inflation increased only slowly during the high-inflation period from 2021 to 2022, but then increased rapidly. This increase added significant upward pressure to non-tradables inflation over late 2024 and 2025. While some movements in administered prices are related to macroeconomic conditions, for instance increasing labour costs, many are not. Administered price changes are relatively less sensitive to monetary policy, because prices often reflect policy decisions rather than decisions by firms. Administered price changes may also reflect demand conditions and cost pressures in the economy, but often respond with a longer lag than prices set by firms.

Annual tradables inflation increased from very low to elevated levels over 2025. Increasing tradables inflation reflected several factors, including higher food prices, increasing overseas travel and accommodation costs, stabilising petrol prices following earlier declines, and a depreciation in the New Zealand dollar exchange rate. Monetary policy in New Zealand has less influence on tradables inflation, as tradables goods and services are more heavily affected by global conditions.

While headline inflation is above the 1 to 3 percent target range, all measures of core inflation have declined to be within the target range. To get a broader picture of underlying inflationary pressure, the Reserve Bank looks at a suite of core inflation measures, which excludes the impact of more volatile price movements and one-off price shifts. On average, core inflation measures have remained broadly flat at around 2.4 percent over 2025 (figure 4.2).

The outlook for key drivers of inflation

We expect headline inflation to return to around the 2 percent target mid-point by early 2027 as non-tradables inflation returns to around 3 percent and tradables inflation declines to around 1 percent. Underlying drivers for non-tradables and tradables inflation suggest that headline inflation will decline. However, this outlook depends on several key assumptions. If key drivers of inflation evolve differently to what we currently assume, this would result in a different outlook for inflation. Monetary policy may need to adjust accordingly to ensure we meet our inflation target.

Significant spare capacity in the economy is assumed to continue to reduce inflation. A negative output gap emerged from the middle of 2024, as economic activity contracted. The economy has been operating with significant spare capacity since then, which has reduced inflation, particularly for non-tradables goods and services.

We estimate that the output gap was around -1.5 percent of potential, seasonally adjusted GDP in the December 2025 quarter. We use a suite of indicators to assess the current output gap, but there is always significant uncertainty around this assumption (figure 4.3). We forecast the output gap to close over the medium term as lower interest rates continue to support stronger demand.

Given its key role in driving inflation, the pace at which the output gap closes is a key risk to the inflation outlook. If economic growth accelerates more quickly than we assume, this could place additional upward pressure on non-tradables inflation. However, if growth isn’t as strong as we expect and spare capacity persists, this could result in lower non-tradables inflation and headline inflation declining below the 2 percent target mid-point.

The experience of high inflation over 2021 to 2023 is resulting in persistent inflationary pressure, but we assume that this will fade over the medium term. Price-setting behaviour describes how firms adjust their prices based on past and expected future inflation.⁴  We monitor a range of modelled and survey-based measures of price-setting behaviour to inform our judgements and assess risks to inflation persistence (see chapter 4.1 in the August 2024 Statement). Our projections assume that price-setting behaviour is adapting to a low inflation environment, and that this will continue to reduce inflationary pressure over the medium term (figure 4.4).

The range of measures we monitor suggest there is a risk of price-setting behaviour adjusting down either more quickly or more slowly than we assume. Higher non-tradables inflation than we had expected over 2025 could be a sign that price-setting behaviour is adapting more slowly than we have assumed. If this is the case, non-tradables inflation may remain high for longer than we anticipate, resulting in headline inflation taking longer to return to the 2 percent target mid-point.

Administered price inflation remains high relative to its historical average (figure 4.5). When inflation increased sharply over 2021 to 2022, administered price inflation was slower to rise than other non-tradables components. However, administered price inflation then increased quickly over 2023 and 2024, and remained historically high in 2025, contributing to a slower reduction in the overall rate of non-tradables inflation.

Our projections assume that administered price inflation will decline over time. Inflation in some administered price components is likely to ease in 2026, for instance:

• electricity, as annual regulated lines charge increases are smaller than in 2025;
• university fees, which showed a large measured price increase in the March 2025 quarter due to a policy change from first-year to final-year free tertiary education, which is not repeated and expected to partially reverse; and
• vehicle licensing fees, which increased in the March 2025 quarter and March 2026 quarter and are not currently scheduled to increase further.⁵

However, we are uncertain about the extent of decline in inflation in these categories, and about the likely trends in inflation for other administered prices. Higher than expected inflation in administered prices remains a key risk. For example, while local council rates increases slowed slightly in 2025, they remain historically elevated amidst ongoing local council funding pressures.

We assume that the New Zealand dollar exchange rate remains unchanged over the projection. The New Zealand dollar exchange rate is a key determinant of tradables inflation, influencing the price we pay for imported goods and services. The New Zealand dollar depreciated over 2025, contributing to higher import costs, but has appreciated since the beginning of the year.

While we assume that the New Zealand dollar exchange rate remains unchanged over the projection period, it is likely that the exchange rate will move over time, contributing to variations in tradables inflation relative to our forecasts. A range of global and domestic risks could result in a higher or lower New Zealand dollar (see chapter 3).

We assume that the cost of New Zealand’s imports evolves in line with historical trends, contributing to low tradables inflation. Our projections assume that New Zealand’s import prices increase by about 1 percent per year in foreign currency terms, around their historical average. This follows several years of small declines in import prices, after a sharp increase during the COVID-19 pandemic. Import prices could fall further if trade is redirected and New Zealand receives cheaper imports from economies facing higher US tariffs (see chapter 4.2 of the May 2025 Statement). Conversely, deglobalisation or trade barriers could result in higher import prices, due to higher production costs for firms using tariffed inputs and less efficient supply chains.