Forecast follows the RBNZ's latest rate decision
According to the latest quarterly predictions from the New Zealand Institute of Economic Research (NZIER) for March, the ongoing decrease in interest rates is fostering a sense of optimism within the New Zealand business community.
Christina Leung (pictured above), deputy chief executive and head of membership services, pointed out that while businesses are hopeful about future economic conditions and demand, these lower rates have not yet led to a significant uptick in actual economic activities.
Household sentiment and spending
Despite the drag of a weaker labour market on consumer confidence, there’s a silver lining as households enjoy reduced mortgage burdens.
“Lower interest rates have lessened mortgage repayments for some borrowers, with further reductions expected this year,” Leung said, adding that retail spending is starting to improve – a trend expected to carry on as more households benefit from the ongoing adjustment to lower mortgage rates.
Labour market challenges and migration trends
The softer labour market in New Zealand has impacted the pace of recovery in the household sector, with job cuts across public and private sectors prompting a migration trend, particularly to Australia’s more robust labour market.
“We expect net migration outflows to Australia to continue, which will contribute to a slowdown in net migration inflows throughout much of 2025,” Leung said.
Impacts on economic growth and sectoral recovery
The subdued migration numbers and lower population growth pose challenges to long-term demand within New Zealand’s economy.
However, the NZIER predicts a lift in annual average GDP growth to around 1.5% in the coming year, driven by the supportive role of reduced interest rates across various sectors.
While these conditions are expected to enhance construction activity, the actual pace of recovery might be tempered by the slower population increase.
Additionally, ongoing geopolitical and trade tensions remain a risk to the economic outlook.
Future monetary policy adjustments
The NZIER monetary policy shadow board recommended lowering the OCR by 50 basis points to 3.75% for February. Following this, the RBNZ cut the OCR by 50 basis points as expected.
“Recent developments suggest continued excess capacity in the New Zealand economy, which provides scope for further interest rate decreases,” Leung said.
The NZIER forecasts additional 25 basis point reductions in the OCR for the upcoming April and May meetings, indicating a more measured approach to monetary policy easing compared to recent months.
Read the NZIER announcement here.
