Growth set to resume as Westpac forecasts further OCR hikes through 2027, but household finances remain under strain
Westpac's latest economic overview says New Zealand's economy is proving resilient despite global shocks, even as the Reserve Bank pushes ahead with further rate hikes to tame stubborn inflation.
Growth stalls, then resumes
According to Westpac chief economist Kelly Eckhold (pictured), economic activity was flat in the June quarter as the Middle East conflict weighed on confidence and household spending, while the unemployment rate climbed to an 11-year high of 5.6%. However, Eckhold notes signs of a turnaround are already emerging.
"Looking forward, we see signs the economy is shaking off these uncertainties, with growth appearing to have resumed in the current quarter," he said.
Westpac is forecasting GDP growth of 2.1% over 2026 and 3% in 2027, with unemployment easing to 4.9% by the end of next year. The bank expects the recovery to remain uneven, with export-driven regions outperforming those more reliant on domestic demand. Westpac describes labour market conditions as "low-fire, low-hire," with firms slow to resume hiring even as activity picks up, and annual wage growth settled at around 2%.
Inflation keeps pressure on the OCR
Inflation reached 4.1% in the year to June — its highest rate in three years — driven partly by a 20% surge in petrol prices following the Middle East conflict. Core inflation has proven stickier, sitting above the RBNZ's 2% target for half a decade.
The RBNZ has signalled it sees a neutral OCR of 3–3.25% and is on track to reach that by year-end. But Westpac expects the central bank will ultimately need to go further, assuming a higher 3.75% neutral rate.
"We continue to assume a 3.75% neutral OCR and so see need to move further than the RBNZ currently forecasts to return conditions to neutral levels," the report said.
Household finances still under pressure
Westpac's report flags continued strain on household finances even as the broader economy recovers. Disposable incomes rose just 3.8% in the year to March, while wages and salaries grew only 0.4% — well below inflation. Housing and land asset values fell 1.9% over the same period, and with real estate making up close to half of household wealth, Westpac notes overall household wealth has been "effectively flat for four years."
What it means for advisers
For mortgage advisers, the forecast path points to continued upward pressure on mortgage rates into 2027. Westpac's own forecast table has the OCR at 3% by the end of 2026, climbing to 4% by the end of 2027 — meaning borrowing costs, while still at stimulatory levels for now, are expected to keep rising well into next year rather than levelling off in the near term.
Housing market activity, meanwhile, is expected to stay subdued, with house prices forecast to remain flat over 2026 before a modest 2% lift in 2027. Westpac notes considerable regional divergence, with Southland recording annual growth of 8.6% against a 4.5% decline in Wellington — with strength concentrated in regions benefiting from stronger agricultural returns and tourism. On the supply side, residential construction activity is expected to pick up after 18 months of moving sideways, with more than 40,000 new homes consented in the year to June.
Risks remain tied to the ongoing Middle East conflict and November's general election, both of which Westpac says could still reshape the outlook. A change in government could also affect the future of the Investment Boost accelerated depreciation scheme and bring proposed changes to land and housing taxation, adding further uncertainty to the housing outlook.
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