Recent economic indicators suggest that New Zealand may be entering a period of easing economic pressure as inflation shows signs of slowing and the Reserve Bank of New Zealand (RBNZ) begins cutting interest rates.
The latest ASB Quarterly Economic Forecast, along with the RBNZ's latest moves, indicates a potential shift in the country’s economic landscape.
ASB chief economist Nick Tuffley noted that the economy has been under significant stress due to high interest rates, but there are signs that inflation is starting to be brought under control.
“The economy has been showing increasing signs of brittleness under the continued pressure from high interest rates. Painful as it is though, inflation is getting under control,” he said.
He predicts that inflation could fall below 3% in the second half of this year and remain contained into 2025.
“Now that interest rates have started falling, and will continue to, confidence will start to lift and people will start making and acting on decisions,” he said. “Some people have been waiting for interest rate to fall before they act. Others have been in ‘survive until ‘25’ mode and will need to wait for cashflows to improve.”
In line with these developments, the RBNZ has initiated its first interest rate cuts, reducing the official cash rate (OCR) by 25 basis points to 5.25%. This marks the beginning of an easing cycle that could continue into 2025.
The RBNZ's decision comes amid signs of a cooling economy, with the central bank’s latest forecasts indicating further reductions in the OCR by the middle of next year.
RBNZ Governor Adrian Orr emphasised that the central bank is confident inflation is back within its target range, allowing for a cautious approach to lowering interest rates.
“We are confident that inflation is back within its target band, and we can commence our renormalisation of policy interest rates,” he said, as reported by Bloomberg. “It’s been about building the committee’s confidence to get moving, and we’re at that point now.”
The decision to cut rates reflects a significant shift in the RBNZ’s stance, as just a few months ago, the bank had signalled that rate hikes could continue and that cuts were unlikely until the second half of 2025.
However, a recent slowdown in both inflation and economic growth has prompted the bank to reconsider its position. The RBNZ now anticipates that the OCR could drop by approximately 100 basis points by mid-2025.
The broader economic outlook remains cautious, with global growth expected to stay below average in 2024 and 2025 as the effects of inflation control measures persist. Despite this, Tuffley said that New Zealand’s economic prospects for 2024 have been revised upwards, with signs that inflation may be more manageable than previously thought.
“The prospects for 2024 have been gradually revised up over the past six months as the battle to contain inflation has increasingly looked like it will be won soon and with some countries proving more resilient than expected,” he said.
On the domestic front, household spending in New Zealand remains under pressure. Tuffley observed that while spending levels saw a strong start to 2024, they are still nearly 3% lower on a per-capita basis compared to early 2022.
“We expect services spending will also see a paring back of growth in the short term while financial pressures remain,” he said.
