New Zealand Institute of Economic Research (Inc)
Media release, 3 March 2026
For immediate release
Recovery finally takes shape, but heightened uncertainty poses downside risks
The long-awaited recovery in the New Zealand economy is finally showing signs of gaining traction as demand conditions improve. Firms are reporting a pick-up in activity in their own businesses, supported by earlier OCR cuts and a lift in export incomes, particularly in the dairy sector. However, heightened uncertainty ahead of the general election and heightened global geopolitical tensions pose downside risks to this early phase of the recovery.
Although spare capacity remains in the economy, rising demand is beginning to reduce this slack. The improvement in activity has been broad-based across sectors, and firms’ hiring and investment intentions have lifted. Nonetheless, the recovery remains fragile, and any postponement of spending and investment decisions could dampen momentum.
Full impact of lower interest rates continues to flow through the economy
The lagged effects of monetary policy easing are continuing to flow through to households and businesses. With a large proportion of mortgages on fixed-term rates, the full impact of earlier OCR cuts is only now being felt as borrowers roll onto lower mortgage rates. This is supporting a recovery in discretionary household spending and lifting business investment intentions.
Recent indicators point to a stabilisation in the labour market. While the unemployment rate rose to 5.4 percent in the December quarter, employment and participation also increased. Hiring demand has lifted in recent months, although wage growth continues to slow, given remaining spare capacity.
Annual inflation above the top of the RBNZ’s target band
Annual CPI inflation rose to 3.1 percent in the December quarter, above the top of the Reserve Bank of New Zealand’s 1–3 percent target band. Encouragingly, core inflation measures remain within the target band, suggesting underlying inflation pressures are contained. We expect annual CPI inflation to remain near the top of the target band in the first half of the year before easing back towards the 2 percent mid-point as spare capacity persists and imported inflation pressures moderate.
We expect the RBNZ to start reducing stimulus in the second half of this year
The combination of emerging recovery and elevated headline inflation presents a delicate balancing act for the RBNZ. While monetary policy remains accommodative, the central bank will need to ensure inflation pressures do not become entrenched. As the recovery becomes more firmly established and inflation gradually eases, we forecast the RBNZ will begin reducing monetary stimulus in the second half of 2026.
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, Deputy Chief Executive (Auckland) & Head of Membership Services
christina.leung@nzier.org.nz, 021 992 985