ASB: Interest rate cuts and economic recovery expected in 2025
New Zealand’s economy is set to turn a corner in 2025, according to ASB chief economist Nick Tuffley (pictured above).
Lower interest rates, improving export conditions, and stronger household spending are expected to gradually lift economic momentum, despite lingering challenges like global trade uncertainty and stubborn domestic inflation.
Interest rates falling as inflation moderates
After a year of sharp changes in monetary policy, the Reserve Bank (RBNZ) cut the OCR by 125 basis points in 2024. ASB predicts the OCR will settle at 3.25% by mid-2025, offering relief for borrowers.
“The RBNZ has cut the OCR relatively quickly since August, when it started the current easing cycle,” Tuffley said. “We expect a third consecutive 50bp cut in February, but beyond that, the pace of cuts is likely to slow.”
Although headline inflation is back within the target band at 2.2%, domestic pressures persist.
Tuffley noted that non-tradable inflation, currently at 5%, still needs to decline closer to 3% to ensure stability. Factors like slower wage growth, moderating rent inflation, and falling input costs will help tame inflation over the year.
Households to benefit gradually
New Zealand households, burdened by rising living costs and interest rates, will see improvements in 2025. Lower mortgage rates, which fell substantially in the latter half of 2024, will provide a much-needed boost to cashflows.
“The cashflow benefit of falling interest rates will build up from now on,” Tuffley said. “Price growth in the housing market should also recover, with annual gains of around 7-10% expected as unsold stock clears.”
While spending on durable goods has been subdued, ASB forecasts a steady pickup in household consumption as mortgage savings filter through the economy.
Global uncertainty could impact exports
On the export front, New Zealand’s commodity prices are showing promising signs of recovery, with dairy prices performing particularly well.
Fonterra’s forecast of $10/kg milk solids would mark a record high in nominal terms, bolstering regional incomes.
However, global uncertainties remain a wildcard. Tuffley highlighted risks stemming from Donald Trump’s re-election and proposed trade tariffs, which could disrupt global trade flows and impact New Zealand exporters.
“The eyes in 2025 will be on what Donald Trump’s presidency brings in terms of economic and foreign policy—particularly trade,” Tuffley said.
2025: A year of gradual improvement
While challenges remain, including global inflation risks and domestic pressures, ASB’s outlook suggests a more positive year for New Zealand.
Interest rate cuts, improving export prices, and rising household spending will underpin the recovery, creating opportunities for businesses and consumers alike.
“The falls in interest rates will gradually work their way through the economy,” Tuffley said. “Here’s hoping for better things in 2025.”
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