New Zealand’s recovery is delayed, not cancelled

New Zealand‘s long awaited economic recovery has been delayed, rather than cancelled.

A more prosperous period is likely ahead, although we do need to exercise some patience.

The Reserve Bank not only cut the Official Cash Rate (OCR) last month, but it slashed its forecasts for where it goes from here.

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At 3.00 per cent, it’s well down from the 15-year peak of 5.50 per cent that prevailed just over a year ago.

Two further 0.25 per cent cuts are expected, taking it to an expected trough of 2.50 per cent.

That’d be the lowest since mid-2022, although it would still be higher than it was in the four years leading up to the pandemic.

The OCR was just 1.00 per cent in the latter months of 2019, before anyone had heard of Covid-19.

At the time, our unemployment rate was 4.2 per cent, much lower than today’s 5.2 per cent.

Like today, trade tensions and slowing global growth were keeping policymakers concerned.

That makes you wonder what’s stopping the Reserve Bank from being even more aggressive.

However, one big difference is inflation.

Back in 2019 headline inflation had been consistently below two per cent for several years, and the more troublesome non-tradables (domestic) inflation was comfortably below three.

Today headline inflation is running at 2.7 per cent, while domestic inflation is higher again at 3.7 per cent.

That headline rate is within the Reserve Bank’s target band of 1-3 per cent, but it’s closer to the top than the bottom.

Even so, an OCR of 2.50 per cent will make a big difference, especially when you consider that the rate cuts up until this point haven’t fully worked their way through the economy.

Mortgage rates are below five per cent now, but (on average) borrowers are still paying some half a per cent above that, if not more.

Most of us fix our mortgages, so when the OCR falls or banks reduce mortgage rates we don’t benefit from those lower costs right away.

Even though people have flocked to the shorter terms in recent years, it still takes time for them to roll off the higher rates and onto the new, lower ones.

I refixed a mortgage in December last year at a rate of 5.59 per cent, for a one-year term.

That was a massive fall from 6.99 per cent 12 months before that.

When renewal time rolls around in December this year, the prevailing one-year rate could easily be a full one per cent lower again.

For a typical borrower with a mortgage of $600,000, the difference could be an additional monthly saving of $351.

Extrapolate that across the economy and you can see how the pressure on household budgets will continue to ease.

This steady stream of mortgages moving onto lower rates will hopefully boost activity and spending, putting businesses in a stronger position and giving them the confidence to grow, hire and invest.

Keep an eye on things like card spending or freight and traffic indicators over the coming months, as well as business and consumer sentiment surveys.

That’s where signs of a rebound could show up first.

It will take some time, but 2026 should be a much better year than the last three have been.

If cutting the OCR to 2.50 per cent is indeed the shot in the arm our economy needs, we could be facing another Reserve Bank tightening cycle sooner than we think.

A few economists have been quick to point this out, and it’s a valid point that we should keep in mind.

But first things first. Let’s focus on the recovery for now, and worry about rising interest rates later.

Besides, I think we’d all be happy to be talking about OCR hikes late next year or in early 2027.

That’ll mean growth has returned, and the economy and labour market have improved.

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