Rate cuts near end, housing gap remains wide
BNZ chief economist Mike Jones (pictured) shared his latest economic outlook following meetings with business groups around the country, offering insights on sentiment, interest rates, regional trends, and housing affordability.
Cautious optimism returns, but North-South divide grows
Jones said business sentiment is improving across much of the country, with cautious optimism beginning to emerge – even if risks remain.
“Our overall sense is that pessimism is continuing to slowly lift… but caution still abounds, particularly in the North Island,” Jones said.
The South Island is faring better, with regions like Otago and Canterbury showing stronger activity levels.
“The South remains much less downbeat, and this inter-island divergence seems to be widening,” Jones said.
Tariffs and export outlook top business concerns
Questions about US trade policy and export commodity prices featured heavily in Jones’ recent client meetings across New Zealand. Global trade disruption and slowing demand are weighing on forecasts, but commodity prices remain historically high.
“Prices are currently skirting record highs in NZ dollar terms,” Jones said. “Global supply in meat and dairy markets is also relatively tight, a steadying factor for prices even if demand tails off a bit.”
Rural incomes are improving, with signs that surplus cash is being used to reduce debt.
“A good chunk appears to be going towards debt reduction… total bank lending extended to the agriculture sector has been declining since January,” Jones said.
Interest rate cuts near bottoming out
Jones reiterated BNZ’s forecast for two more 25bps cuts by the Reserve Bank, bringing the OCR down to a low of 2.75%.
“The broader point is that the rate cutting cycle appears to be entering its final stage… we still expect [six-month and one-year fixed mortgage rates] to dip into a 4.5–5% range over the second half of the year,” he said.
Jones added that while further falls in rates are possible, the room to move is narrowing – and the OCR could begin rising again by late 2026 as economic growth picks up.
“They’re pencilled in, yes, mostly as a nod to the fact that the OCR cycle will turn at some point… the timing is wildly uncertain,” he said.
RBNZ is expected to pause in July, with a possible cut in August, and now sees the OCR bottoming at 2.85% by early 2026, down from 3.1%. Key indicators like the ANZ and NZIER surveys will guide its next move, amid rising global trade risks. Alternative scenarios show the OCR falling to 2.55% or rebounding to 3.5%, highlighting continued uncertainty.
Property recovery continues – but new builds still costly
Despite recent home price gains, the gap between building and buying remains significant.
“Our back-of-the-envelope estimates put the ‘new build premium’ for the average consented stand-alone house at 180–200k,” Jones said.
While building costs have plateaued, labour expenses are expected to keep pressure on project budgets.
“More of the narrowing in the build vs. buy gap is likely to come via rising existing home prices,” Jones said.
However, the latest data showed limited momentum on that front. Cotality’s Home Value Index reported a 0.1% dip in the national median in May, with property values still 1.6% below last year and 16.3% under their 2022 peak.
Population shifts and regional demand
Jones confirmed ongoing internal migration towards the South Island.
“Even if we don’t have up-to-the-minute numbers, the ongoing economic outperformance of the South Island hints at a continued relative boost from people inflows,” he said.
While Auckland and Wellington see people leaving, regions like Northland, Otago, and Canterbury are experiencing net inflows – supporting housing demand in those markets.
Government spending cuts unlikely to weigh on recovery
Budget 2025 contained spending reprioritisation, but core Crown expenditure is still expected to grow 2.3% in FY2025.
“General government activity won’t be a massive drag, but it won’t be an active participant in the recovery either. It’s a big growth gap to fill for the private sector,” Jones said.
Jones also noted that while New Zealand’s debt levels are better than many peers, its disaster risk profile and ageing population mean maintaining a conservative debt position is wise.
For Jones’ full insights, head over to the BNZ blog.
