225 basis points down, but there is still not much heat in the economy
The Reserve Bank has delivered 225 basis points of rate cuts in the last 12 months, and another may be on the horizon - however, New Zealand's economic recovery is still stubbornly muted.
As advisers prepare for next week's monetary policy decision, a growing body of evidence suggests that lower borrowing costs alone just aren’t enough to jumpstart domestic demand.
Kiwibank economist Sabrina Delgado described the current conditions as "reminiscent of GFC-type times." The deteriorating labour market, with total hours worked following GDP downward, suggests the June quarter contraction may be deeper than initially anticipated.
"The labour market is really deteriorating and hasn't stabilised yet, activity is going backwards, and we need rate cuts to really get things going," Delgado said, adding that the slack in the labour market is very much disinflationary.
“It continues to reinforce that we’re not at risk of this temporary inflation spike that we’re seeing to stick around.”
Borrowing behaviour in line with uncertainty
This cautious economic outlook is being reflected in borrower behaviour, according to Tony Alexander's latest mortgage adviser survey. Despite significant rate cuts, market activity has plateaued, with only a net 8% of advisers seeing more first home buyers – a substantial decline from the 52% recorded in February.
The preference for short-term fixing has become entrenched, with Alexander noting that "with almost no fear evident of interest rates rising for a long time and with some extra easing of monetary policy anticipated, borrowers are mainly fixing for short time periods."
His August survey shows 42% of advisers report clients prefer one-year fixed terms, while 21% favour 18 months and 23% choose two years.
This short-term focus indicates expectations of further rate cuts, rather than confidence in economic recovery. The surge in refinancing enquiries is more telling, with a net 33% of mortgage advisers reporting increased activity. Alexander attributed this to "the large volume of fixed rates coming up for renewal before the end of this year plus awareness of cash-backs which banks are offering new clients.”
Underwhelming response to monetary stimulus
The disconnect between aggressive monetary easing and economic activity is becoming increasingly apparent. ASB's latest economic analysis shows that despite mortgage rates falling from 6%+ to the high 4% range, "interest-rate sensitive pockets of the economy" including retail spending and housing market activity remain largely muted.
ASB economist Wesley Tanuvasa warned that a “wealth-driven spending boom remains some way off”, and house prices aren’t likely to go anywhere too quickly either.
“NZ house prices are around 15% below late 2021 peaks,” Tanuvasa said. “Any material momentum in house prices likely requires a positive migration swing or improving labour market – both of which are unlikely to be realised by year end. Rather than using the house as an ATM, households in aggregate are deleveraging and are making additional mortgage repayments (a record $17.1bn in the June 2025 year).”
Looking ahead to the RBNZ's 20 August decision, ASB expects a 25 basis point cut to 3.00%, consistent with May guidance.
Kiwibank senior economist Mary Jo Vergara said “the door is open” for another rate cut next week, as all data is pointing towards lower rates.
