Business confidence weaker as inflation pressures up ahead of OCR decision

Tuesday, 7 October 2025

The researcher is still picking a 25 basis point cut in the OCR tomorrow, but sees nothing in its findings that would steer the central bank away from a 50bp cut.

The New Zealand Institute of Economic Research has confirmed a drop in business sentiment and warned of a pick-up in inflationary pressures on the eve of the Reserve Bank delivering an expected cut in interest rates.

Its Quarterly Survey of Business Opinion, which is one of a number of variables watched by the Reserve Bank, found a net 15% of firms expected an improvement in general economic conditions over the next six months.

But that was down from a net 26% expecting an improvement in its June survey.

There was a decline in confidence across most sectors, NZIER deputy chief executive Christina Leung said.

Westpac senior economist Michael Gordon said the survey data supported its view that the Reserve Bank would cut the official cash rate by 50 basis points to 2.5% on Wednesday, though that is not NZIER’s own prediction.

ANZ senior economist Miles Workman agreed the data increased the odds of a 50bp rate cut. “All up, we still think strategy favours a ‘dovish’ 25bp cut tomorrow, but today’s data move it towards the coin-flip realm. A 50bp cut would not be difficult to justify,” he said.

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A net 14% of firms reported a decline in their own business’ activity in the latest quarter.

“A significant gap remains between firms’ experienced demand, which is still weak, and their expectations of improved demand ahead,” NZIER said in its report.

A net 23% of firms cut staff numbers in the September quarter, it also reported, and a net 13% intended to reduce their investment in plant and machinery over the coming year.

“The continued disappointing nature of the recovery in demand, combined with the volatile global backdrop, is driving heightened caution among firms,” it said.

Leung said it was “a pretty weak set of results, when it comes to business investment”.

Fewer than 4% of responses to the survey were received after September 18, when Stats NZ reported a shock 0.9% drop in economic activity in the June quarter.

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Separate consumer and business surveys released by ANZ late last month suggested confidence had taken a further knock as a result of the release of that data.

But potentially also of concern to the Reserve Bank, NZIER reported a pick-up in inflationary pressures in the September quarter, when many economists expect inflation will rise from its last recorded measure of 2.7% to close to, or just above, 3%.

A net 11% of firms reported they had increased prices in the September quarter, versus a net 1% reducing prices in the June quarter.

NZIER said it expected inflation would rise to just above 3% — outside the Reserve Bank’s target band — “over the coming quarters”.

“However, continued excess capacity in the New Zealand economy should drive inflation back towards the Reserve Bank’s inflation target mid-point of 2% over the coming year,” it said.

Economists are divided on whether the Reserve Bank is likely to cut the official cash rate by 25 basis points or 50 basis points tomorrow.

BNZ senior economist Jason Wong said yesterday, ahead of the release of the NZIER survey, that its findings could potentially tip the balance.

Leung said its forecast was for a 25bp drop in the OCR tomorrow and when the bank released its final monetary policy statement for the year next month.

But if the bank’s monetary policy committee had decided on a 50bp drop, there was probably nothing in the Quarterly Survey of Business Opinion that would change its mind, she said.