Pre-election forecasts show a stronger fiscal outlook, but economists urge caution
New Zealand borrowers face a higher interest rate path and a slower housing recovery than the Treasury forecast at budget time. That's according to the Pre-election Economic and Fiscal Update 2026 (PREFU). The update shows the government's books in better shape, but it warns that inflation and rate pressures have built since.
Rates forecast to stay higher for longer
The Treasury now expects 90-day interest rates to peak at around 3.8% by mid-2029, up from a peak of 3.3% forecast at the budget. It said long-term wholesale rates are at multi-decade highs, pushing up borrowing costs across the economy.
Markets have also shifted. They now price the official cash rate (OCR) at around 3.9% by October 2027, up from 3.5% when the forecasts were set.
Westpac noted the economic forecasts were locked in on 21 August, when oil prices and bond yields were materially lower than today. It added that the Treasury had raised its 10-year bond yield forecast by just 10 basis points to 4.7%, significantly below where those bonds are currently trading.
The Treasury forecasts annual inflation to ease from 4.1% in the June 2026 quarter to 1.9% a year later. ASB said that return to 2% by mid-2027 is considerably earlier than it expects.
Taken together, the forecasts point to fixed mortgage rates remaining under pressure, and borrowing capacity staying tight for first-home buyers and property investors.
Housing recovery pushed out
The Treasury has downgraded its house price outlook, pointing to higher rates, more new housing supply, and slower migration. National prices have been broadly flat for about 18 months. The picture is split regionally: parts of the South Island tied to exports are still seeing gains, while the North Island's main cities are going backwards. ASB said the Treasury expects house price growth to recover only gradually, from 0.6% in 2026/27 to 4.8% by 2030/31.
Jobs outlook improves, but risks remain
The Treasury expects unemployment has peaked at 5.6% and forecasts it to ease to 4.3% by the end of the forecast period.
On the fiscal side, the operating balance before gains and losses, excluding ACC (OBEGALx), is forecast to improve from a deficit of $6.8 billion in 2026/27 to a surplus of $4 billion in 2028/29. Net core Crown debt is expected to peak at 43.9% of GDP in 2027/28, then fall to 39.5% by 2030/31.
The stronger outlook has allowed New Zealand Debt Management to cut this year's bond programme by $4 billion to $30 billion, Westpac said.
Bank economists cautioned against reading too much into the medium-term numbers, with the 7 November general election set to determine the fiscal path.
"Forecasting the return to surplus is different from actually achieving it," said Mark Smith, senior economist at ASB, in its PREFU review.
Darren Gibbs, senior economist at Westpac, said in Westpac's PREFU economic bulletin that "the market should treat the medium-term forecasts in the PREFU with due caution."
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