Fragile growth, rising pricing pressure keep rate risk in play
New Zealand’s economy is heading into winter with an awkward mix for mortgage clients: weaker business confidence, but inflation that refuses to ease and an oil shock still building.
NZIER’s latest Quarterly Survey of Business Opinion shows sentiment has deteriorated sharply, with “Only a net 1% of firms [expecting] better general economic conditions over the coming months”, down from 39% in December. Trading activity was broadly flat in the March quarter, but firms reported scaling back staff numbers and investment as the US‑Israel war with Iran disrupted shipping routes and pushed energy costs higher.
The survey found a net 9% of firms cut staff over the quarter and a net 5% plan further reductions, while a net 12% intend to trim building investment and 9% expect to cut plant and machinery spending, quantifying the hit to hiring and capex.
Construction is bearing the brunt of the downturn. Building firms were the most pessimistic in the survey, and NZIER reported architects seeing a weaker pipeline of residential, commercial, and government work over the next one to two years – a signal that new‑build activity could slow further.
Inflation still too high for comfort
Those geopolitical pressures are already showing up in the latest inflation data. Headline CPI held at 3.1% in the March quarter, with non‑tradables inflation stuck at 3.5% and higher petrol and diesel costs driving a renewed rise in tradables prices.
Measures of core inflation have edged lower but remain too high for the Reserve Bank (RBNZ) to relax. Kiwibank argues that the March report “does not support immediate rate hikes as priced in the market… but it does highlight the awkward starting point for inflation leading into the conflict in the Middle East.” That starting point increases the risk that any further oil‑price spike or supply‑chain disruption forces a stronger policy response.
ASB’s read‑through from the QSBO reinforces that message. The bank notes that “Pricing intentions lifted from net 25 in Q4 to net 43 in Q1”, a shift consistent with inflation running closer to 4.5%–5% over the year ahead. NZIER is a touch more sanguine, saying cost and pricing indicators suggest inflation remains contained in the New Zealand economy for now, but it stresses that uncertainty around the conflict means the balance of risks is still skewed to the upside.
RBNZ patience thinning as earlier, longer OCR hikes loom
Taken together, the surveys and CPI figures still point to an RBNZ that would prefer to “wait and watch” rather than rush into action. But with pricing intentions rising and business investment and hiring under pressure, the margin for patience is narrowing.
NZIER continues to “pencil in” a first 25‑basis‑point OCR hike in July, while ASB and Kiwibank warn that persistent inflation could demand a steeper path. The key takeaway is that the first official cash rate increase could arrive earlier – and be followed by a more persistent tightening cycle – than clients had assumed.
See the NZIER announcement here.
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