Brand new year, new challenges.

As the year gets underway, the New Zealand economy feels like it’s at a turning point. There’s been a significant easing in monetary policy over the past year, the full impact of which is yet to be felt. As lower interest rates work their way through the economy, we expect to see economic conditions and the labour market gradually firming. In fact, we’ve already started to see spending picking up.

However, for now the economy is still dealing with some important challenges. Most notably, unemployment remains elevated and the cost of living is continuing to squeeze households. At the same time, the housing market has remained flat, and that’s likely to remain the case at least in the near term.

2026 is also likely to see a shift in the relative performance of regions across New Zealand. Over the past year, firm commodity prices and stronger conditions in our rural regions underpinned growth. This year growth is likely to be more broad-based, with lower interest rates likely to support activity across the nation.

RBNZ Governor seeks to calm markets

Last year we saw the likely end of the RBNZ’s easing cycle, with the market’s attention swiftly turning to the timing of possible hikes. The pulling forward of rate hike expectations saw RBNZ Governor Breman taking the rare step of commenting on monetary conditions outside of the usual window that follows a Monetary Policy Statement (MPS) or Review.

Governor Breman emphasized that financial conditions have tightened relative to the assumptions embedded in the November MPS forecasts, and that there is still a lot of water to go under the bridge before OCR increases come into view. It seems clear that the RBNZ was not seeking a significant tightening in financial conditions and is now sending the signal that market pricing of OCR increases had run significantly ahead of the data and RBNZ thinking. Indeed, in one interview she noted “…given that we see inflation also falling and being low and stable going forward, it's very important now that we see growth that's lasting, that we see that we have a period where growth is coming back.”

In the wake of the Governor’s comments, market pricing shifted out again, with markets now expecting just one hike this year. We remain comfortable with our longstanding forecast of a single hike in 2026 (which we’ve pencilled in for the December meeting, after the General Election), with gradual hikes after that time.

These comments from the Governor are a welcome move, and hopefully we see further such comments in between policy statements from the RBNZ. The Governor noted that there is support amongst the MPC for introducing increased transparency around individual MPC member’s views and adding an additional (likely January) meeting into the calendar. However, with RBNZ policy meeting dates already announced through to February 2027, any change in the frequency of RBNZ meetings is still a way off.

Fiscal policy: Less debt now, more debt later

Just before the close of last year, Treasury released the Half Year Economic and Fiscal Update (HYEFU). The local bond market welcomed the HYEFU, with this year’s bond programme unexpectedly revised down by $3bn to $35bn and next year’s programme revised down by $2bn to $34bn. However, the entirety of that revision was driven by a decision to reduce the Crown’s minimum liquidity buffer by $5bn to $10bn (phased in over two years). As we discussed in our review, the underlying fiscal outlook portrayed by the Treasury was in fact slightly weaker than we had expected. This was reflected in the further delay of the projected return to surplus (now 2029/30 on the Government’s favoured OBEGALx measure) and a $4bn upward revision to the projected bond programme in both 2027/28 and 2028/29.

It is worth noting that the Treasury’s forecasts were finalised back in late October, prior to the more recent run of more positive economic indicators (culminating in last month’s GDP report). However, these forecasts were also finalised prior to the recent marked easing of dairy prices (discussed further below). We also note that the Treasury’s forecasts for financing costs are based on what we would consider to be optimistic forecasts for interest rates, with the OCR forecast to remain below 3% throughout the forecast period and the 10-year bond rate around the 4% level. Absent a much stronger cyclical upswing in the economy than we currently expect, the balance of risks remains skewed towards more bond issuance than depicted in the HYEFU.

September quarter GDP rebound

On the activity front, the September quarter saw a rebound in economic growth. As we set out in some detail in a post-release chart pack, GDP grew by 1.1% over the quarter, ahead of our 0.9% pick and at the top of the range of market forecasts (0.6% to 1.1%). Growth for the quarter was broad-based, with gains in all but two industries. Revisions to previous quarters meant that the annual growth rate landed in line with our forecast of +1.3%. This was the first year-on-year increase since June 2024.

We expect further solid growth in the coming quarters, albeit with some lingering seasonality in the reported data. We are forecasting 1.7% growth for 2025 and 3.0% over 2026.

Overall, the GDP figures represent an upside surprise to the RBNZ’s forecasts and imply less spare capacity in the economy than they had anticipated. The RBNZ had previously signalled some small chance of another OCR cut. But with GDP ahead of their forecasts and other signs that economic activity is firming, the chance of another OCR cut in the near term looks remote.

December quarter CPI tracking firmer

On the prices front, Stats NZ’s November update was a bit firmer than we expected. That surprise was due to the volatile travel categories, and means the risks to our forecast for a 0.3% quarterly rise in the overall CPI (out 23 January) are tilted to the upside.

Our existing forecast is already higher than the RBNZ’s November MPS forecast for a 0.2% rise. We expect both tradables and non-tradables inflation will be a bit hotter than the RBNZ expects in the December quarter, with tradable prices accounting for most of that difference. We’ll finalise our forecast after Stats NZ releases its monthly price update for December this Friday.

Looking to 2026, our forecasts remain for a gradual easing in inflation from its current level of 3% in the year to September, and we expect inflation will be comfortably inside the RBNZ’s target band by mid-2026. A key reason for that is the continued softness in housing related costs. Housing rents, which are the largest component of the CPI, have recorded very low increases in recent months, with annual rental inflation slowing to its lowest levels since 2010. And with continued increases in housing supply and low population growth, we expect rental growth will remain subdued for some time. Similarly, construction cost inflation has slowed sharply over the past year, and it is likely to remain muted in the early part of 2026.

The housing market ended 2025 with limited momentum

Turning to the housing market, it was a soft end to the year. Sales fell 3% in November, and prices were down 0.3% (adjusting for normal seasonal variations).

Smoothing through the usual month-to-month swings, the broader picture in New Zealand’s housing market is one of limited momentum. Sales have been tracking sideways. And while we’re seeing mixed trends in prices around the country, the overall picture has been flat since mid-2023.

This continued softness is especially notable given the large falls in interest rates over the past year. However, those interest rate falls have occurred at the same time as we’ve seen a large increase in the number of properties for sale. In fact, adjusting for normal seasonal trends, the number of homes available for sale is at its highest level in a decade.

Looking ahead, with the RBNZ signalling that the rate cutting cycle has likely come to a close, we’re expecting only modest house price growth over the year ahead. And at this stage, the risks appear tilted towards continued softness in the housing market, at least in the early part of the year.

Global dairy prices under downward pressure

Finally, after a string of declines late last year, the first GlobalDairyTrade (GDT) auction for 2026 saw a sharp rise in dairy product prices, with the overall GDT index rising 6.3%. That was led by a 7.2% rise in the price of whole milk powder – the most important commodity in the New Zealand export basket.

Late last year, Fonterra reduced its estimated milk payout by a further 50c to $9.00/kgMS (with a range of $8.50-$9.50). As an approximation, each 50c reduction in the payout equates to around a $1bn reduction in export revenue (just over 0.2% of GDP). While Fonterra’s revised forecast is below our current forecast of $9.30/kg, the rebound in the early January auction limits the downside risks. We’ll wait to see how dairy prices evolve before considering whether any revision to our forecast is necessary.

The week ahead

Locally, the highlight of this week’s data calendar will be the NZIER’s Quarterly Survey of Business Opinion (out Tuesday). This will be closely watched by the RBNZ to gauge how the economy and inflation are tracking at the start of the new year. Late in the week, Stats NZ will release its December prices update, which will be a key input into next week’s December quarter CPI.

Offshore, Australia has updates on household spending (Monday), consumer confidence (Tuesday) and inflation expectations (Thursday). In the US, December’s CPI report is out Tuesday, with the retail sales report out on Friday. There will also be several Fed speakers throughout the week.

Q4 NZIER QSBO

Jan 13: General business confidence - last: +15

The QSBO will be closely watched by the RBNZ ahead of their February policy meeting. The last update pointed to soft but improving trading conditions, with businesses expecting a firming in activity over the coming months. We’ll be watching to see if the December quarter survey reinforces the picture of strengthening economic momentum in recent months. The measures of price pressures will also be closely watched, with recent surveys pointing to ongoing cost pressures, but limited ability to raise output prices.

Q4 Westpac-McDermott Miller Employment Confidence

Jan 14: Last: 89.9

Despite nudging higher in our last survey, confidence in New Zealand’s job market remained low through the middle part of the year. A perceived lack of job opportunities and low job security continue to be key concerns for New Zealanders. Since our last survey, economic activity has started to firm, but monthly jobs figures have remained subdued. The latest survey was conducted on 1-11 December.

Nov Building Consents

Jan 14, last +7.2%, Westpac f/c: -5.0%

We’re forecasting another modest easing in building consents in November after a large number of medium density projects were approved in the past couple of months (medium density projects are often approved in batches and can be ‘lumpy’ on a month-to-month basis). But more important than such monthly swings, the total number of homes consented over the past 12 months has been steadily climbing in recent months. We expect that trend will continue in the new year, pointing to a gradual rise in residential construction over 2026. On the non-residential front, commercial consents have been tracking sideways with businesses still cautious about significant capital expenditure at this stage.

Dec Selected Prices

Jan 16

Stats NZ Selected Prices provides monthly updates on around half of the quarterly CPI (out 23 January). Recent updates have pointed to some upside risk to our forecast for a 0.3% rise in the quarterly CPI. That’s mainly due to gains in the travel-related categories, and we’ll be watching how those track over the summer. In terms of the other big components, food prices are expected to be flat, with falls in meat prices offsetting a seasonal rise in fresh produce. We’ll also be keeping a close eye on rents, which are the largest component of the CPI. Rental growth has slowed sharply over the past year, dropping to its lowest levels since 2010. We’re forecasting that softness will continue into the new year.

Media contacts

Satish Ranchhod, Senior Economist

+64 9 336 5668 +64 21 710 852

satish.ranchhod@westpac.co.nz

Michael Gordon, Senior Economist

+64 9 336 5670 +64 21 749 506

michael.gordon@westpac.co.nz

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