Anticipation is high with the RBNZ's May statement anticipated next week, and the budget set to land on Thursday
This week is shaping up to be a huge one for New Zealand’s economic outlook, with the Government’s Budget announcement on Thursday and the Reserve Bank’s Monetary Policy Statement (MPS) following close behind next Wednesday. With both events landing within a week of each other, banks and economists have been releasing their latest outlooks, and there’s a clear theme emerging: the economy is still soft, rate cuts are likely, and borrowers are hungry for relief.
BNZ, ASB and Kiwibank are predicting a 25 basis point cut at RBNZ’s May meeting, while Westpac predicts that it will fall to a low of 3% by July. ANZ is predicting a low of 2.5% by October.
Kiwibank chief economist Jarrod Kerr has been especially vocal about the need to move into stimulatory settings.
“We have monetary policy which is restrictive, which still baffles me,” he said. “We’ve got a cash rate of 3.5%, we know neutral is closer to 3%, and we’re still in restrictive territory given the recession that we’ve been through.”
“Every economist thinks they’re going to cut to 3% or below – we’d argue they should do a 50 basis point move in the May meeting just to stop mucking around. Our argument is that we need to go to 2.5% on the Cash Rate and get into that stimulatory territory.”
Cuts, reallocation and restrained spending
Finance Minister Nicola Willis has named Budget 2025 “The Growth Budget”, and Prime Minister Christopher Luxon has stated that it “won’t be a lolly scramble.”
From a fiscal perspective, the budget is expected to be “broadly contractionary,” with BNZ predicting further cost-cutting and significant reallocation of spending in a bid to return to surplus by 2029. Westpac agrees, expecting the Budget to reaffirm the government’s medium-term strategy of restraint, noting that spending restraint will require “significant discipline and ongoing tough choices.”
This disciplined approach is unlikely to materially shift the government’s borrowing programme, though BNZ says a modest $4 billion increase is possible, mainly due to earlier overfunding and potentially higher capital investment.
Mortgage trends show signs of life, despite slow growth
For mortgage advisers, one of the biggest themes in the current outlook is how interest rate expectations are shaping lending rates, and by extension, the housing market.
According to BNZ, current mortgage pricing already assumes the Reserve Bank will deliver a rate cut next week and follow up with two more in coming months. That expectation is baked into advertised rates, like the popular 4.99% two-year fixed. But if the RBNZ were to surprise markets by pulling back on that easing trajectory, lending rates could move higher again, further tightening conditions for borrowers.
For now though, the shift toward lower rates is helping to turn the dial on housing demand. As Westpac noted: “Improved affordability has seen increased demand from first home buyers and other owner occupiers. We’ve also seen investors returning to the market (though they remain a smaller presence than they were in the years prior to the pandemic).”
Kerr believes this momentum will continue – if the RBNZ does its part.
“Mortgage rates have moved quite a bit,” he said. “But the money markets are only factoring in a Cash Rate falling to 2.75%. If we’re right and they cut to 2.5%, there’s more downside for all interest rates in this economy. If we’re wrong and they only go to 2.75%, current mortgage rates like the 4.99 on the two-year is probably about right. If we’re all wrong and they stop at around 3%, then that 4.99 would look pretty good.”
Kerr said the key dynamic is what happens as more borrowers come off older, higher fixed rates.
“Let’s say they stop at 2.75% – the 4.99 rate just holds for longer,” he said. “That’s important because people are rolling off, and as they roll off and go onto these rates, the effective mortgage rate keeps heading lower. That’s the financial relief that households want and need.”
On the property side, supply is helping to keep things grounded. Kelvin Davidson, chief property economist at Cotality noted that there are still plenty of listings on the market, which is giving borrowers some pricing power.
“There are still credit restraints too. Obviously the LVR rules are still at play, and the DTI rules are lurking in the background,” he said.
“Of course, everybody could be wrong – but there is a consensus in the market that we are looking at a flatter period for house prices ahead. It might tick up 3-4% year on year, but for first home buyers, there is time to shop around without that past concern of getting left behind.”
