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Going Up, Going Down

Economist Cameron Bagrie takes a good, hard look at New Zealand and how we’re going as a nation.

15 April 2024


With the New Zealand economy contracting three out of the past four quarters, annual growth turning negative, a clear sign of a recession, the unemployment rate moving up and inflation easing, the case looks solid for interest rates to come down. Financial markets are anticipating the Official Cash Rate (OCR) could fall 150 basis points over the coming 18 months.

Follow the leader

Expectations for lower interest rates are a global theme, with the US Federal Reserve, Bank of England, Bank of Canada, European Central Bank and Reserve Bank of Australia all expected to cut their cash rates in 2024. The key driver is moderating inflation.

Sticking point

The path to lower interest rates faces a hurdle. New Zealand’s headline inflation has fallen to 4.7 per cent but domestic, or what is called non-tradable inflation, is exceeding expectations, proving to be sticky and sits at 5.9 per cent. As the Reserve Bank commented last November: “Members noted that tradable inflation can be volatile and cannot be relied upon to achieve their inflation target. Non-tradable inflation is easing only gradually and, while all measures of core inflation have declined, they are still elevated.”

Continuing to bite

Some fixed borrowing rates may have eased back from their peak, but many people are still facing higher interest costs. There is around $200 billion of mortgages to refinance in the coming year. At the end of November, the weighted average yield on a fixed loan was 5.6 per cent, well below current fixed loan rates.

Local authority rates

Could 10 per cent-plus be the new normal for annual increases in local authority rates over the coming decade? It looks so. Councils’ operating expenditure is exceeding operating income by around 8 per cent and plugging that gap means 15 per cent higher rates. Interest costs are adding to expenses, and we have decades of under-investment and poor maintenance of infrastructure to address.

Good news or not good news?

Migration has surged with Statistics NZ reporting a net inflow of 127,400 in the past year. That has helped alleviate labour shortages and provides a base for demand, which we are seeing in indicators such as rents and construction costs which have accelerated. The latter puts pressure on inflation and dampens prospects for lower interest rates.


Term deposit balances with banks have surged, enticed by 6 per cent term deposit rates. An additional $27.7 billion has been put on term deposit in the past year and $56.9 billion in the past two years, taking total term deposits to $214 billion, just under half of all bank deposits.

Positive again

Household net wealth is rising again, helped by a slight increase in house prices, lifting $5 billion in the September 2023 quarter, the first rise in six quarters. Household net wealth rose to $2,293 billion in the September 2023 quarter, although is down from its December 2021 peak of $2,761 billion. Household net worth fell by an average of $33.6 billion over the previous six quarters, feeling the impact of falling house prices.

Household cost of living

The cost of living is a huge concern to households and most attention is on consumer price inflation, which stands at 4.7 per cent, down from a peak of 7.3 per cent. While the decline is welcome, it is still a long way from two per cent, which is the target. Household cost-of-living inflation is seven per cent. Household living-cost indexes include interest costs, but excludes construction costs. Interest payments have increased 31 per cent for the average household over the past 12 months (note that is the average household).

Welcome Minister

From the Treasury’s Briefing to the Incoming Finance Minister (BIM): “The economic and fiscal situation will be challenging over 2024. The New Zealand economy has entered a period of slow growth in response to tighter monetary policy necessary to tackle inflation, and other economic headwinds such as slower global growth. The outlook is for the Official Cash Rate to remain around current levels for some time. A substantial fiscal consolidation is required to bring revenue and expenses back into balance and support fiscal sustainability.” Buckle up.

Pick your driver

Migration, interest rates, access to credit, the Reserve Bank’s loan-to-value ratio policy and debt-to-income rules are all pointed to as factors driving house prices. But what about Tobin’s Q, the market value of an asset compared to replacement cost? With construction costs up sharply in the past two years, and house prices falling 16 per cent from their peak, the economic incentive might have shifted to buying the existing stock (and renovating).

Welcome Minister 2#

New Zealand faces longstanding challenges beyond low productivity, a key influence on living standards. Two other challenges are education and housing. “Student achievement is declining and will exacerbate intergenerational disadvantage and inhibit productivity growth. Housing affordability is among the worst in the OECD, creating pressure on households and distorting investment flows.” Eyes will be on the substance in the policy platform to address these challenges.

Correct as at 14 February 2024.

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