Reserve Bank an unexpected fly in the economic ointment
Sunday, 30 November 2025
OPINION: Are we there yet?
You know, we might be.
Through two years of government sloganeering about getting the economy “back on track”, and a “laser focus” on growth, growth, growth (while delivering just the opposite), it has been easy to forget that the economy would at some stage start to perk up.
And that time may have finally arrived.
Not the frost-tender “green shoots” that have so often withered over the past year or so, but a solid base for a steady – though not spectacular – turnaround in the country’s economic outlook.
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The evidence is by no means unequivocal, and the economic buzzword from the Reserve Bank and Treasury is “subdued”.
But the wilting seems to have stopped.
On the positive side, unemployment at 5.3% is high (though not by comparison with historical downturns) but is stabilising. However, switching jobs, and getting out of the jobless queue is harder than it has been in past downturns – the so-called “low hire-low fire” scenario. Employment was 0.6% lower in the Sept quarter than a year earlier while the working age population increased 0.9 % in that time.
The housing market is steadying after the huge post-Covid plunge that took the wind out of consumer confidence. The Reserve Bank thinks house prices will show moderate growth “in line with the growth in nominal incomes”. In other words, not drowning but treading water in real terms.
The cost of living is still hurting household budgets, but the recent rebound in inflation to 3% ought to be short-lived.
The rash of major provincial business closures from earlier in the year has at least taken a breather, retail sales figures are looking better, and just this week the official cash rate has been lowered to 2.25%, giving mortgaged households another lift in disposable income. The latest ANZ business confidence survey suggests a broad-based improvement in general sentiment and businesses’ “own activity” measure, although the bank’s chief economist Sharon Zoller warns that it will feel like a “hard yards” because the improvement comes off a low base.
According to the central bank, household spending and private investment are expected to be subdued this year. Government spending on consumption and investment, which had fallen since late 2021 but increased in the first half of 2025, is expected to grow but at a subdued pace.
Internationally, the implementation of Donald Trump’s absurd tariff policy has not been as bad as the rhetoric promised, and key New Zealand exports representing 25% of our exports to the US – including beef and kiwifruit – have had the punitive 15% tariff rate removed
That, combined with the big Fonterra payout next year from the sale of its Anchor and other brands, should keep farmers smiling and investing despite a recent easing of dairy prices. That word “subdued” comes to mind again.
The most recent Treasury fortnightly update, released this week, reflects a similar muted but positive note. Manufacturing is a little better, and new orders have improved. But consumers remain cautious and the service sector, which has consistently contracted since early 2024, is still lagging.
Prices have eased for food and rents are … yes, subdued.
Immigration is not providing the usual fillip, with population growth of only 0.7% in the June year compared with 1.7% and 2.3% in 2024 and 2023 respectively.
The sum of all those unders and overs is that while the economy shrank 0.9% in the June quarter, we can look forward to a more cautiously positive result from the September and December quarters, including a reversal of an unusually large “seasonal balancing item” that contributed to the bad June figure.
If there was one fly in the ointment it came this week from the surprising direction of the Reserve Bank. Surprising, because it was the bank’s swift interest rate cuts from 5.5% in mid-2024 to 2.25% now that have provided the feed stock for a return to growth.
In what was a hawkish monetary policy statement – well OK, a statement with a subdued hawkish undertone – it suggested that while risks to inflation were in balance and all “optionalities” are at its disposal, this week’s cut to 2.25% could be the last in this cycle. Its graph of the future OCR track bottomed out just below 2.25% suggesting there was only a slim chance of another cut (although confusingly the central bank sees the risks as tilted towards another cut).
For borrowers looking to pick the right time to fix their mortgages, that was a clear signal that the wait may be over, and it was time to move – a trend that could push up demand on banks and lessen the pressure for more mortgage rate cuts.
Some market players felt that despite the rate cut, there had been a de facto tightening of monetary conditions and hence a potentially slower recovery in the economy and the housing market than a more even-handed outlook could have delivered.
So, it was no surprise that swap rates – which influence mortgage rates – rose, the kiwi dollar firmed a little and the main banks have (so far) limited their response to cutting floating rates, not fixed rates.
It was not the best-case scenario for the Government, which already may be facing a further deterioration in its forecast Budget track, and a delayed return to surplus in the Treasury’s half year update next month.
The two major pillars of its re-election chances – and Prime Minister Christopher Luxon’s odds of leading National into that election – are stable and persistent lower mortgage rates and an economic upturn will be as strong as possible by late 2026.
The odds are looking better, but the RBNZ may have subdued them.