While mortgage rate downtrend is over, a period of consolidation is approaching
BNZ chief economist Mike Jones (pictured) says there are growing reasons not to “stop believin’” in a New Zealand recovery, with recent business surveys pointing to momentum building faster than expected.
“Recall, last year ended with cracks of light beginning to appear in the economy,” Jones said, noting Q3 GDP’s “surprise 1.1% bounce” and a “breezy read on ANZ business confidence” that supported expectations for an upturn through 2026.
New NZIER results have “added important weight to the notion the economy is shifting into gear”, he said.
“A net 23% of surveyed businesses surveyed by the NZIER expect trading activity to lift over the coming three months – the highest in four-and-a-half years. All sectors shared in the gains, but with the manufacturing sector the most optimistic, matching the PMI’s better vibes.”
Jones said firms are “clearly signalling firmer intentions to invest and hire over the coming three months”, and even “long beaten-down profitability expectations squeaked back above average for the first time since 2021.”
His optimism lines up with other bank commentary: ASB says New Zealand is “moving in the right direction” and that 2026 “holds the most promise in a number of years”, while Westpac has also highlighted recent NZIER and PMI data showing stronger business sentiment and early signs of stabilisation in the labour market and construction.
Labour market stabilising, inflation easing towards 2%
The improving activity pulse is starting to chip away at spare capacity.
Many more firms now plan to raise prices – with the net balance jumping to +25% from +7% in Q3 – and that reported labour availability has also tightened to “less easy” levels.
That fits BNZ’s view that “the unemployment rate probably peaked at 5.3% in the third quarter of last year,” although Jones still expects it will be “the second half” of 2026 before joblessness trends lower.
On inflation, a slightly firmer Selected Prices update has seen BNZ lift its Q4 CPI pick to 2.9%, but Jones still sees “annual inflation nearer 2% by the end of the year”.
“Falling rates of both inflation and unemployment, if realised, would be well received by households still under the cosh from cost pressures,” he said, noting their forecasts imply a decline in the “misery index” (unemployment plus inflation) after rising through 2025.
House price forecasts cut, market ‘still in balance’
BNZ has nudged down its forecast for annual house price inflation to 2% for calendar 2026, from 4% previously, with supply now a clear headwind.
“As we said at the time: ‘the residential construction cycle seems to be turning at a time when population growth is yet to do so’." Building intentions are “hitting highs not seen in either four-and-a-half or 11 years” and consents are trending up, with around 36,000 consents lodged in the year to November, 7% above the prior year.
“There hasn’t been anything in recent housing market statistics to suggest house prices are about to break out of their three-year long stasis,” he added, with unsold inventory around 10‑year highs and sales tracking new listings. “It all points to a market still in a broad state of balance, a neutral signal for house prices," Jones added.
Mortgage rates: downtrend over, period of consolidation ahead
Jones said BNZ’s interest rate forecasts are unchanged, but recent data “does strongly suggest the next move in the official cash rate is up, and perhaps earlier than Reserve Bank (RBNZ) and our own forecasts.”
The bank has the first OCR hike pencilled in for early 2027, but Jones acknowledge "markets’ pricing of a 25bps lift by the end of this year is a fair assessment of where the risks lie."
That pricing has seen “December’s big increases in wholesale interest rates largely sustained,” meaning “we can draw a line under the downtrend” in mortgage rates."
“In short, after the flurry of activity in December, we suspect we’re in for a period of consolidation in term mortgage rates,” Jones said. With the mortgage curve now “more clearly upward‑sloping”, longer 2+ year fixes may look less appealing, but BNZ still sees “more merit in looking to extend the term of mortgage borrowings” for borrowers coming off fixed rates.
For the full BNZ report, click here.
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