New Zealand’s central bank will need to move aggressively to raise interest rates if it wants to contain inflation, even if that means a hike just 10 days before a general election, economists say.

While inflation edged lower in the third quarter, many analysts see it accelerating well above 4% in the fourth quarter and potentially staying outside the 1-3% band the Reserve Bank targets for longer than the central bank had previously projected. That outlook, driven by rising fuel prices and a weak currency, will require the RBNZ to raise the Official Cash Rate to 3% on Wednesday next week, a majority of economists say.

“Higher for longer inflation is a major headache for the RBNZ,” said Mark Smith, senior economist at ASB Bank in Auckland, who sees inflation above 3% until the fourth quarter of 2027 and tips a rate hike on Oct. 28. “We expect the RBNZ to acknowledge that they have more work to do and to maintain a conditional tightening bias.”Sustained inflation and higher interest rates may not be good news for the center-right government, which is in a down-to-the-wire fight to retain power at the Nov. 7 election. But, as an independent central bank, the RBNZ has a legal requirement to steer its own course.

“No matter what central banks say, they are very wary of becoming embroiled in an election campaign,” said Stephen Toplis, head of research at Bank of New Zealand in Wellington. “It will be no different this time around.”While, to some, that may imply a pause next week, not raising rates “might be seen as overtly political given we are already amid a tightening cycle and inflation pressures have recently jumped,” he said.

A lot has changed since Governor Anna Breman and her Monetary Policy Committee colleagues said in September they planned to gauge how their back-to-back rate hikes in the third quarter would impact the economic recovery. That led to bets on a potential October pause.

Those wagers have all but disappeared as renewed hostilities in the Middle East sent global fuel prices higher, driving New Zealand pump prices above their April highs, while the New Zealand dollar is about 4% lower than the average level the RBNZ assumed for the fourth quarter.

A report yesterday showed third-quarter inflation slowed to 3.7% — largely due to a drop in fuel prices that has since reversed. But measures of core inflation edged higher, adding to signs of more widespread price pressures. Among local economists, provisional estimates for fourth-quarter inflation range from 4.3% to 4.7%.

Investors see about an 85% chance the OCR will be increased a quarter-point to 3% at the October meeting, and an almost one-in-two likelihood it will rise to 3.25% in December, swaps data show.

Most economists also see further increases beyond next week. ASB’s Smith expects a follow-up hike to 3.25% in December and a move to 3.5% in February before a pause. BNZ forecasts the OCR rising to 3.75% by the first quarter next year, while Westpac projects a peak of 4% in the second half of 2027.

“It’s likely that more restrictive conditions will be required to push core inflation back sustainably to 2%,” said Westpac’s New Zealand chief economist Kelly Eckhold. “Needless to say, the path of the OCR in 2027 will depend on the evolution of numerous factors that remain very uncertain, not least being developments in the Middle East.”