Can RBNZ's easing of interest rates spark a much-needed economic revival?
As inflation dips to 2%, Westpac chief economist Kelly Eckhold (pictured above) noted that RBNZ can now more flexibly manage interest rates, stating, “The RBNZ has rightly stepped up the pace of easing.”
With expectations of further interest rate cuts and a softening labour market, New Zealand appears to be on the path to recovery, although challenges remain as geopolitical tensions and domestic uncertainties continue to play a role.
Expectations include another 50 basis points (bp) cut before Christmas and further reductions in early 2025, with the OCR anticipated to fall to 3.50% by May 2025.
The financial squeeze is easing
The financial pressures that households have faced are starting to lift. Borrowers are transitioning from high fixed mortgage rates, which will reduce debt servicing costs. Recent fiscal measures, including tax cuts, are providing modest income support. However, consumer sentiment remains weak, with spending projected to stay subdued through 2024.
The housing market has likely troughed
Eckhold noted an improvement in housing market sentiment due to lower mortgage rates. However, “the momentum in house prices remains limited,” with prices stabilising rather than soaring.
Increased listings give buyers ample options, but rising unemployment and a sluggish economy are still constraining house prices.
Net migration expected to slow to zero
Net migration has slowed below pre-COVID levels, and a further decline is expected through 2025.
“The previous surge in foreign arrivals was concentrated in sectors such as construction and hospitality,” Eckhold said, as demand shifts towards skilled workers.
Meanwhile, elevated departures of New Zealanders, particularly to Australia, may hinder domestic workforce growth.
Job losses rising, unemployment to peak mid-2025
The prolonged economic slowdown is impacting the labour market, leading to rising unemployment, expected to peak at 5.6% by mid-2025.
“Businesses have tended to hold on to workers… This creates a risk of a wave of delayed layoffs,” Eckhold said.
Wage growth is also expected to slow, particularly outside sectors like health and education.
Business sentiment: Signs of stabilisation
Despite ongoing challenges, businesses reported that trading conditions are leveling off, with a notable uptick in sentiment.
“Many businesses are optimistic that the fall in interest rates will help to stoke demand over the year ahead,” Eckhold said.
Although operational costs remain high, the pressure on profit margins is easing.
Residential building finding a base
While residential building remains soft, growth is anticipated in 2025, supported by dropping interest rates and government initiatives.
However, non-residential development remains mixed, with businesses cautious about new commercial space due to current economic conditions.
No immediate need for increased government borrowing
Westpac’s forecasts indicated that while the current cash position is above expectations, the OBEGAL deficit is projected to exceed budget forecasts.
“Achieving a surplus in ’27/28 still looks like a struggle,” Eckhold said, noting that a persistent fiscal deficit could threaten New Zealand's credit rating.
Global monetary policy normalisation steps up
Central banks worldwide are progressing towards their inflation targets, with the US Federal Reserve expected to ease policy further.
Eckhold said that despite these adjustments, global growth remains slightly below average, with risks stemming from geopolitical tensions and the upcoming US election.
New Zealand’s current account deficit remains large
With the current account deficit at 6.7% of GDP, there are concerns over sustainability.
“Increased savings are required to lower the deficit sustainably,” Eckhold said, emphasising the need for adequate household and government savings to meet investment needs.
Back in the band, but big differences under the surface
While inflation has improved, significant disparities in cost pressures persist across the economy.
Eckhold predicted that inflation could dip modestly below 2%, but domestic inflation pressures remain a concern.
RBNZ’s ability to normalise rates hinges on these dynamics, with a cautious approach to future adjustments warranted as the economy navigates recovery.
