Flat house prices seen testing New Zealand’s recovery
A dovish turn from the Reserve Bank (RBNZ) has raised the hurdle for early official cash rate (OCR) hikes and tilted the outlook toward a softer New Zealand dollar, according to Westpac chief economist Kelly Eckhold (pictured).
RBNZ tone “more dovish than market expectations”
In a note titled Reflecting on a dovish RBNZ, Eckhold said February’s economic outlook was “a mix of optimism and pessimism”, with “a higher bar for an early start to OCR increases and a bias towards a weaker exchange rate.”
That assessment comes on the heels of the central bank’s latest policy decision. At its February review, the RBNZ left the OCR at 2.25% and signalled it is prepared to sit tight while above-target inflation drifts back toward the 2% midpoint over the next year. In a later speech, Governor Anna Breman stressed that policy must remain “forward‑focused”, saying “we base our monetary policy decisions on a forecast of where inflation is heading, and not on where inflation is today.”
Eckhold said Breman’s first Monetary Policy Statement “was notably more dovish than market expectations”, even though RBNZ still sees a December hike as “likely (but not certain)”. The subtext, he argued, is that the “balance of risk has tilted away from an interest rate rise ahead of the general election on 7 November”, reducing the chance of a pre‑election tightening cycle.
Stronger growth, but slower repair of slack
Despite very low interest rates, Westpac says the central bank has painted a surprisingly cautious medium‑term picture. RBNZ projects GDP growth of around 2.8% in both 2026 and 2027, “solidly above trend growth and sufficient to eat up excess capacity eventually”. But those numbers are “not any stronger than presented late last year” despite a run of better‑than‑expected indicators.
RBNZ has trimmed its forecast for growth in the second half of 2026 from 1.5% to 1.2%, meaning the output gap does not close until the end of 2028 and the unemployment rate still sits at 5% by late 2026.
That “less optimistic view of the future” leaves inflation pressures looking contained, which is why Breman emphasised “that market pricing of at least one OCR increase in 2026 was too aggressive”. Any late‑2026 hike “is hardly a done deal”.
Housing pessimism and questions over neutral rate
Westpac highlights housing as a key source of RBNZ’s caution. After months of flat or falling prices, the bank assumes house prices will be flat in 2026 despite above‑trend growth, with only “a marginal improvement in 2027”. Eckhold calls that “a remarkable assumption”, noting RBNZ previously expected a 3.8% rise for 2026. Historically, a 2.8% GDP expansion would “usually see house prices rise at least somewhat,” while zero house‑price growth would normally line up with GDP closer to 1.5%.
Such scenarios, he argues, pose “hard questions” about New Zealand’s growth potential and the true “neutral” interest rate. If even a 2.25% OCR is “not really that stimulatory”, it could mean neutral sits lower than the commonly cited 3–4% range.
FX implications: weaker NZD, softer NZD/AUD
Eckhold says these pessimistic paths also weigh on the exchange rate.
With “foreign exchange … a relative game” and other economies moving ahead, “we shouldn’t see a very strong exchange rate at all if these more pessimistic scenarios come to pass,” the Westpac economist said.
The pressure looks “particularly pressing versus the currently strong Australian dollar where interest rate expectations are firming”, leading Westpac to “slightly” revise down its NZD/AUD view for the next six months.
Ultimately, Westpac remains more optimistic than RBNZ about the eventual strength of the recovery, but Eckhold cautions the debate “is not going to be settled until the second half of 2026” when the two sets of forecasts begin to diverge more clearly.
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