THE FACTS
- The Reserve Bank may cut the Official Cash Rate by a further 25 basis points to boost the economy.
- Despite lower rates, growth remains modest, with business activity in contraction and unemployment at 5.3%.
- Tourism and agriculture show resilience but consumer sentiment and business investment remain weak.
When the Reserve Bank of New Zealand meets at the end of the month, the question may not just be whether monetary policy has eased enough to stabilise the economy, but whether it has done enough to reignite it.
The answer, on balance, is no.
Despite a recent upturn in sentiment and a rally in the New Zealand sharemarket to record highs, the underlying evidence points to an economy that remains subdued, with excess capacity and cautious demand.
A further 25-basis-point cut to the Official Cash Rate (OCR) may therefore be warranted to ensure the recovery gains traction and does not stall before it gathers real momentum.
The 50 basis-point-cut by the Reserve Bank of New Zealand (RBNZ) last month has taken the OCR to its lowest level since 2022, and further eased borrowing costs for households and businesses. Lower rates have boosted equity valuations and lifted investor confidence, with the market now anticipating that the easing cycle will continue.
Yet, as encouraging as the stockmarket’s momentum may appear, it does not reflect an immediate reality for most households and firms. Growth remains modest, business activity surveys remain in contraction and inflation, while easing, sits at the upper edge of the RBNZ’s 1–3% target band. Central bank officials appear comfortable with the latter, citing slack that still exists in the economy.
The case for another rate cut is not about fuelling exuberance; it is about ensuring the fragile recovery becomes more durable.
Several recent corporate updates have painted a picture of an economy still searching for a foothold, with results differing markedly by sector.
Logistics firm Freightways noted a modest recovery in parcel volumes and described the New Zealand economy as no longer a headwind, though it had “yet to spark any material growth”.
Vulcan Steel also struck an optimistic tone, with the metals distributor saying domestic manufacturing had stabilised. Both companies appear to be early beneficiaries of lower interest rates and improving sentiment.
In contrast, Fletcher Building said market conditions remain extremely weak, with expectations of subdued demand persisting across residential and commercial construction.
Port of Tauranga reported that trade and container volumes for the first quarter were up 5.9% and 9% respectively on a year ago but the port kept a conservative outlook for the remainder of the year.
Briscoe Group’s latest update told a more nuanced story. Sales were down 1.8% year-on-year, although homeware sales grew modestly. Management at the retailer welcomed the recent rate cuts but said this had yet to translate into a meaningful uplift in consumer sentiment.
Westpac’s full-year results added a broader perspective, underlining that confidence remains fragile across the financial system. The bank highlighted subdued credit growth, rising mortgage stress in some regions, and ongoing pressure on small business lending.
While lower rates are easing repayment burdens, Westpac noted that credit demand remains weak, a clear sign that households and firms remain hesitant to borrow or invest.
The bank expects GDP growth to remain below trend through 2026, reinforcing the case for continued monetary support until stronger momentum takes hold.
Recent data continues to paint a mixed picture. Both the manufacturing and services sectors are in contraction.
Unemployment has risen to a near nine-year high of 5.3% as hiring slows, while hours worked per employee have declined.
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Job advertisements have dropped back to 2022 levels. Business and consumer sentiment, while showing signs of stabilising, remains fragile. Net migration, a major driver of recent population growth, has slowed sharply, reducing the boost to consumption and housing demand seen earlier in the year.
It is, however, not all negative, and there are some encouraging pockets of resilience.
Tourism continues to perform well, and while recent dairy auctions have softened, agriculture remains a relative bright spot.
The recent approval of Fonterra’s $4.2 billion sale of its global consumer and associated businesses will result in around $3.2b being returned to farmers once the deal is completed in the first half of 2026, a windfall that should flow through to rural economies and broader consumption.
Construction data also points to tentative stabilisation. The latest RLB Crane Index shows 116 cranes across the seven major centres, up 11 from the previous survey.
Auckland’s crane count has risen 13.3% since Q1 2025, marking its first increase since early 2022. While this suggests a modest rebound in infrastructure and commercial activity, it is coming off a very low base, a sign that capacity is being rebuilt, not overstretched.
Lower rates have also begun to ease debt-servicing burdens, but household spending remains cautious and business investment weak. A further 0.25% reduction will help ensure borrowing costs remain supportive and encourage the flow of credit through the economy.
While inflation hit 3.0% in the September quarter (the highest since June 2024), this is no barrier to another rate cut. The increase was driven largely by electricity, local authority rates and vegetables – items influenced more by supply factors than excess demand.
In contrast, inflation in discretionary categories continues to moderate, and with a slowing jobs market there are few signs of wage-driven price pressure. With inflation expectations anchored and spare capacity still evident, the risks of easing too far appear limited.
Financial markets are already anticipating that the easing cycle has further to run.
Borrowing rates, though, arguably don’t yet reflect the full extent of the cuts still to come.
With competition among banks yet to intensify, there remains scope for lending rates to fall further, which is welcome news for households and first-home buyers, many of whom are only now beginning to refix loans.
Around 40% of total mortgages are due to refix over the next four to five months, which should provide further tonic for the economy.
Business confidence will also likely improve further with a additional rate cut before the year is done.
The stockmarket will also likely price in an enduring recovery ahead of time, with investors anticipating improving conditions months before they become evident in the real economy.
For that recovery to spark up, rather than simply flicker, policy settings must stay ahead of the curve. A further 25-basis-point cut at the end of this month would be a logical continuation of the RBNZ’s easing cycle.