A stronger fiscal outlook won't stop the RBNZ from lifting the OCR
New Zealand's 2026 Budget delivered a materially better fiscal outlook than most expected — but for mortgage brokers and their clients, the headline message is less about fiscal repair and more about what comes next for interest rates.
Both ASB and Westpac economists note that budget 2026 signals an earlier-than-forecast return to underlying surplus, with the OBEGALx measure now forecast to reach $2.6 billion in surplus by 2028/29 — a year ahead of the previous Half Year Economic and Fiscal Update (HYEFU) projections.
The improvement is driven primarily by stronger Crown revenues, with core Crown receipts forecast to be a cumulative $10.8 billion higher than HYEFU projections over 2026/30. Net core Crown debt is now expected to peak at 46.1% of GDP in 2027/28, well below Treasury's recommended prudent limit of 50%.
Inflation complicates the picture for borrowers
The improved fiscal story comes with a significant caveat for borrowers: inflation has been sharply revised upward. Treasury now forecasts CPI peaking at 4% in the June 2026 quarter — well above the RBNZ's 1–3% target band — driven largely by the Iran conflict's impact on global oil prices. The unemployment rate is forecast to peak at 5.5% in mid-2026 before declining as the recovery takes hold from 2027.
Critically, fiscal settings for 2026/27 are more expansionary than HYEFU forecasts, which ASB senior economist Mark Smith (pictured left) flagged as a risk.
"We still expect a steady sequence of 25bp hikes from July and a 3.25% OCR by year end. Fiscal largesse could see the OCR peak higher than this," Smith said.
House prices are expected to track sideways through 2026 before growing at an average annual rate of 3–4% over the forecast period — modest comfort for clients assessing borrowing capacity or investment returns.
What advisers need to watch
The rate trajectory is where brokers need to focus most closely.
Westpac chief economist Kelly Eckhold (pictured right) and senior economist Michael Gordon noted a meaningful divergence between the Treasury's interest rate assumptions and market reality.
The budget assumes the 90-day bank bill rate at just 2.8% in the June 2027 quarter — broadly flat from today — whereas Westpac's own forecasts see the rate reaching 4% by that point. That gap matters significantly for clients fixing mortgage rates over the next one to two years.
A new prudential levy on banks, non-bank deposit takers, insurers, and financial market infrastructure providers — expected to raise $209 million over four years — adds a modest additional cost dimension for lenders that could eventually filter through to pricing.
Both banks agree the budget is unlikely to substantially shift the RBNZ's thinking, with government spending as a share of GDP set to decline over time. The bigger variable for mortgage rates is whether the Iran conflict proves transitory or more persistent than Treasury assumes. As Westpac noted, an election year spend-up ahead of November's general election "could see history repeat itself with the OCR having to go higher than this."
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