New Zealand Institute of Economic Research (Inc)
Media Release, 26 November 2024
For immediate release
NZIER Quarterly Predictions, December 2024
The continued easing of inflation pressures in the New Zealand economy has allowed the Reserve Bank of New Zealand (RBNZ) to ramp up its pace of interest rate cuts. Annual CPI inflation is back within its 1 to 3 percent inflation target band, and indicators point to a further easing in broader inflation pressures. The central bank has become more confident that inflation expectations are anchored at the inflation target mid-point. This has allowed It to cut the Official Cash Rate (OCR) further and step up the pace of this easing. The RBNZ followed up its August OCR cut with a 50 basis point cut in its October meeting, with another likely at the November meeting.
Intensifying speculation that the RBNZ would ease monetary policy aggressively led many households to fix for shorter terms at the repricing of their mortgage rates. Over half of mortgages are due for repricing within the coming six months. This continued shortening in the duration of the New Zealand mortgage book suggests the transmission of OCR changes on the broader economy will be quicker than has been the case historically.
Lower interest rates have supported a recovery in consumer and business confidence. Firms in the retail and service sectors are feeling particularly upbeat about an improvement in general economic conditions. With these sectors being generally more exposed to households, the lift in sentiment in these sectors suggests expectations that lower interest rates will have a particularly positive impact on households.
For now, though, demand remains soft as households and businesses remain cautious about spending and investment. Firms are continuing to cut staff numbers, and this is driving an increase in the unemployment rate. Given that the labour market tends to lag behind broader economic activity, we forecast a further increase in the unemployment rate and for it to peak later next year.
We forecast annual average GDP growth to recover to around 2 percent by the end of 2025, as lower interest rates support a pick-up in demand across a range of sectors in the New Zealand economy. Escalating conflict and geopolitical tensions present some downside risks to the growth outlook.
Nonetheless, the current slowing in the New Zealand economy is broadly in line with the RBNZ’s forecasts. We expect that beyond the rapid pace of OCR cuts this year, the central bank will be more measured with its pace of monetary policy easing next year. As such, we have pencilled in an OCR of 3.5 percent for the middle of next year.
Quarterly Predictions is an independent review of New Zealand’s economic outlook and includes comprehensive forecasts of the economy. The full publication is available exclusively to NZIER’s members.
For further information, please contact:
Christina Leung, Deputy Chief Executive (Auckland) & Head of Membership Services
christina.leung@nzier.org.nz, 021 992 985