Households and businesses grapple with high inflation and rising interest rates - Quarterly Predictions, June 2023

New Zealand Institute of Economic Research (Inc)
Media Release, 30 May 2023
For immediate release

NZIER Quarterly Predictions, June 2023

As New Zealand recovers from the severe weather events earlier this year, high inflation and rising interest rates have become the key headwinds for households and businesses. These headwinds are weighing on both business and consumer confidence, and this is leading to caution towards spending and investment. The upcoming general election adds to uncertainty over the general economic outlook. 

Signs higher interest rates are starting to dampen demand

There are signs in recent months that inflation is turning a corner, although inflation pressures remain intense in the New Zealand economy. Principal Economist Christina Leung says, “The Reserve Bank of New Zealand has increased the official cash rate (OCR) since October 2021, but we are only starting to see the dampening effects of higher interest rates on the broader economy. This lagged transmission of monetary policy partly reflects the substantial proportion of mortgages on fixed-term mortgage rates. With around half of mortgages due for repricing over the coming year, we expect that as many households face significantly higher mortgage repayments, they will continue to rein in discretionary spending.” 

Softer demand has supplanted finding labour as the top primary constraint for businesses surveyed in the NZIER Quarterly Survey of Business Opinion. This shift suggests capacity pressures are easing in the New Zealand economy as slowing demand becomes more of a concern for businesses. 

The reopening of international borders is also helping to alleviate labour shortages in New Zealand. However, there is also a large degree of speculation over the net impact of the strong recovery in net migration on inflation. While easing labour shortages will reduce capacity pressures in the economy, migrants will also add to the demand for housing and a range of goods and services. 

RBNZ expects OCR to have peaked in this cycle  

Stronger-than-expected net migration and Budget 2023, viewed as expansionary for the New Zealand economy, had increased speculation that the RBNZ would increase its OCR projections at the May Monetary Policy Statement. However, the central bank surprised markets by indicating it did not expect it would have to increase the OCR further, given signs of easing inflation. “We also expect the OCR to have peaked at its current level of 5.5 percent. As households roll off historically low fixed term mortgage rates onto significantly higher rates we expect a further slowing in broader economic activity. This should support a further easing in inflation back towards its inflation target band of 1 to 3 percent next year.”

Quarterly Predictions is an independent review of New Zealand’s economic outlook and includes comprehensive forecasts of the economy. The full publication is available exclusively to NZIER’s members. 

For further information, please contact: 
Christina Leung, Principal Economist & Head of Membership Services 
christina.leung@nzier.org.nz, 021 992 985