Inflation, the RBNZ and the Cost of Capital: Where We Are in the Cycle

Setting the Scene

New Zealand's inflation backdrop has shifted markedly over the cycle. After the surge that drove the RBNZ to raise the OCR sharply in 2022–2023, inflation returned to within the target band through 2025, allowing the sustained easing cycle that delivered relief to borrowers.

That journey — from elevated inflation and tight monetary policy, to moderating inflation and an easing OCR — defines the current environment for property finance and private credit. Understanding where we are in the cycle is the most important macro question for sponsors and investors in this market.

The Inflation Trajectory

The RBNZ targets inflation in a 1–3% annual band. Through 2025, domestic inflation eased as the effects of higher rates fed through to demand, the housing market, and construction activity. Goods inflation moderated as global supply chains normalised, while services inflation — historically stickier — took longer to respond.

By early 2026, the bank was positioned with the OCR at a level consistent with inflation settling around the midpoint of the target, with the remaining risk balanced between over- and under-shooting.

What This Means for the Cost of Capital

The cost of capital is not just the policy rate — it is the policy rate plus the risk premium a lender charges for the specific exposure. Two features matter:

• The risk-free floor (anchored by the OCR) has fallen through the easing cycle, lowering base funding costs
• Credit spreads for property development lending have, if anything, widened slightly as banks have pulled back, reflecting greater perceived construction and refinancing risk

So wholesale investors in private credit are, in the current environment, earning a combination of a lower but still meaningful risk-free base plus an elevated spread for property-secured risk. That combination is at the heart of why private credit has attracted capital in this cycle.

The Balance of Risks

As the easing cycle matures, the risks become more two-sided. If inflation proves sticky, the RBNZ may pause cuts or hold; if activity softens more than expected, further easing and a lower OCR floor could follow. Sponsors and investors who build their capital structures and portfolios to perform across a range of these outcomes — rather than betting on one path — are the ones who weather the next phase best.

Fox Partnerships' View

We focus less on forecasting the precise OCR path and more on ensuring the structures we build — whether a sponsor's capital stack or a wholesale investor's private credit exposure — are robust across a realistic range of inflation and rate outcomes.

Fox Partnerships does not provide financial advice. General commentary only.