Kiwibank has adjusted its forecasts, and it's looking muted
Kiwibank has downgraded its economic growth forecast for New Zealand to just 0.9% for 2025, down from a previous projection of 1.4%. Its housing market forecasts have also decreased, with prices continuing to trade sideways.
Chief economist Jarrod Kerr said the global growth outlook is “cloudier than ever”, and New Zealand’s small open economy is particularly vulnerable to instability from overseas.
Despite this, Kerr said that he maintains a sense of cautious optimism for the second half of the year going into 2026 – but stressed the need for stronger stimulatory settings.
“We still believe in the process, and that’s lowering interest rates and getting things moving,” Kerr told NZ Adviser.
“Those lower rates are feeding through, and I think that will result in a better second half of this year. We expect that 2026 is when things will start humming again, and we’ll see the economy expanding and businesses investing and hiring.
“There is a lot going on unfortunately, so it is a murky and muddy outlook, but we are optimistic.”
Housing market remains in distress despite rate cuts
The housing market has consistently disappointed forecasters and remains central to Kiwibank's concerns about the broader economic recovery. House prices have traded sideways for the past two years, and Kiwibank currently expects a 2% to 3% price growth by year-end, followed by 5% to 7% growth in 2026.
Kiwibank noted that the housing market plays a crucial role in economic recovery through the wealth effect, where rising prices boost consumer and business confidence. A recovering housing market would encourage households to spend more and help businesses repair their balance sheets faster, eventually lifting hiring and investment intentions.
Kerr said that more stimulatory interest rates would absolutely give the housing market a boost, which only adds pressure on RBNZ to “not muck around” with cuts.
“If it were up to us, we’d be cutting down to 2.5% quickly,” Kerr said.
“If that proves to not be enough, then you can keep cutting until it does bite and have an impact on growth. If it proves to be too much, it’s very easy – you just raise rates again. What we need to be confident in is that the economy is bouncing back.”
“If interest rates were stimulatory, you would be seeing more in the housing market,” he said. “The central bank and the previous government were focused on getting house prices under control, and they’ve done that. Now it’s time to allow some growth.”
A July pause? Further cuts needed to boost recovery
Kiwibank forecasts the Reserve Bank will deliver another 75 basis points of rate cuts beyond the 225 basis points already implemented since August 2024, bringing the cash rate to a terminal level of 2.5%.
Wholesale markets have already priced in one more 25 basis point cut to 3%, and the view is increasingly that the RBNZ may put a pause on cuts in July. Kerr said that more aggressive action is still needed to stimulate the housing market and broader economy, and the current policy stance remains insufficient despite the significant easing already delivered.
“We think that potentially pausing in July, which is what the market thinks they’re going to do, is not the right path,” Kerr said.
“We need stimulatory monetary policy, not restrictive. I know they say we’re pretty close to neutral, which means that interest rates are not really hurting or restraining – but the next step is to make interest rates attractive to both businesses and households so they can go out and expand, look for opportunities, and go for growth.
“We’ve got a government that’s saying they’re going for growth, and I think we need a central bank that'll go for growth.”
Kiwibank’s latest forecast expects inflation to spike temporarily to 2.7% this year due to tariff implementations, but sees no cause for panic as medium-term inflationary pressures should ease. Import prices are likely to fall as exporters adjust to weaker global demand, while trade diversion could bring goods originally destined for other markets to New Zealand at discounted prices.
With this in mind, Kerr said the RBNZ should aim to get the OCR below 3% as quickly as possible – though currently, the central bank seems to be following the global trend of “wait and see” what happens with US tariffs.
“There is some merit in that, but not when the economy is as weak as it is here,” Kerr said. “I can understand that stance somewhere like the United States, but not in New Zealand.”
