Rate cuts expected as pressures ease
New Zealand’s economy is showing early signs of stabilising, but overall growth remains subdued, according to Westpac NZ’s latest insights.
“The downturn that we saw over the past year has flattened off, and we’re starting to see some early signs of a firming in demand,” said Satish Ranchhod (pictured above), Westpac senior economist.
However, sluggish conditions persist across key sectors like construction and manufacturing.
Retail spending rose 0.6% in October, marking its third consecutive monthly increase following tax cuts in July and the Reserve Bank’s (RBNZ) rate reductions starting in August.
Despite this improvement, spending remains below early 2024 levels, reflecting a slow recovery.
Housing and construction flatline
The housing market continues to lag, with sales tracking sideways and prices declining by 0.5% in October.
Residential construction also remains weak, with dwelling consents and concrete production showing no significant improvement.
Ranchhod predicts that a substantial recovery in the housing and construction sectors will not materialize until late 2025.
“We expect residential building activity will remain subdued through the final months of this year and early next year,” Ranchhod said.
Inflation pressures decline
Inflation has slowed to 2.2% annually, with additional downward pressure anticipated through the end of the year.
October saw food prices drop by 0.9%, alongside more subdued increases in hospitality, fuel, and rent costs.
“The overall trends that we’re seeing are consistent with a continued cooling in underlying inflation pressures,” Ranchhod said.
Westpac forecasts a 0.4% rise in consumer prices for the December quarter, below the RBNZ’s August projection of 0.5%. This well-contained inflation outlook supports expectations of a 50bp OCR cut in the RBNZ’s upcoming November meeting.
Westpac on global risks and policy outlook
While inflation is easing, risks remain. Rising domestic costs, such as council rates and insurance premiums, are limiting the decline in non-tradables inflation.
Additionally, global uncertainties following the US election could offset gains from lower imported inflation.
Looking ahead, Ranchhod expects RBNZ to take a more cautious approach, forecasting smaller 25bp cuts in 2024 and a cash rate of 3.5% by mid-2025.
“The RBNZ will adopt a more gradual and data-dependent approach to policy changes next year,” Ranchhod said.
Read the Westpac weekly commentary in full.
Get the hottest and freshest mortgage news delivered right into your inbox. Subscribe now to our FREE daily newsletter.
