Expectations of interest rate relief in 2026 are becoming less likely as inflation continues to show signs of persistence. Earlier optimism about a clearer path back to target has faded, replaced by a recognition that price pressures are easing more slowly and unevenly than hoped. Although a rate cut is still possible next year, the likelihood of it occurring has diminished, and any move would probably be confined to the second half of 2026 at the earliest.
The key challenge is not a single data point but the broader pattern of inflation behaviour. Goods-related prices have moderated substantially, but services inflation, particularly in areas tied to the property market, remains stubborn. Rents, utilities, insurance and other labour-intensive services continue to record elevated increases, reflecting deep structural shortages and capacity constraints. These categories tend to unwind gradually and are less sensitive to interest rate settings, making them a central concern for the Reserve Bank.
For the property sector, these pressures carry significant implications. Persistent rental inflation points to ongoing supply shortages, while elevated construction and maintenance costs highlight the difficulty of bringing new housing to market quickly. Even with early signs of improving supply pipelines, the sector is still working through the after-effects of labour shortages, high materials costs and project delays.
Meanwhile, parts of the broader economy are clearly slowing. Household spending remains subdued, business confidence is mixed, and discretionary sectors continue to soften. Under different conditions, these signs of cooling would normally strengthen the case for easing monetary policy. Instead, the Reserve Bank is likely to prioritise sustained evidence that inflation is returning to target, particularly given its recent tendency to stabilise or re-accelerate rather than fall steadily.
The possibility of a further rate increase has not been eliminated. While it remains an unlikely scenario, the persistence of services inflation means the risk sits in the background. Policymakers will want to avoid inflation becoming entrenched, meaning they will keep all options open until the disinflation trend is unambiguous.
For now, the most plausible path is an extended period of rates staying where they are. Borrowing costs are expected to remain elevated for much of 2026, with any reduction pushed toward the end of the year. For property, this means ongoing pressure on affordability, careful lending behaviour and continued reliance on strong population growth and rental tightness as key drivers of housing activity.
Ultimately, while inflation will continue to ease over time, progress is proving slower than anticipated. That delay is now shaping the interest rate trajectory, and reinforcing the likelihood that 2026 will be another year of higher-for-longer mortgage costs before any meaningful relief arrives.
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