Economists say more tightening risks recession, not taming demand
Kiwibank’s economics team is pushing back against market calls for more Reserve Bank (RBNZ) rate hikes, arguing that further tightening would do more harm than good.
Chief economist Jarrod Kerr and economist Alexandra Turcu (pictured left to right) say the Middle East conflict and fuel price spike are already squeezing households and businesses. They argue this is a supply‑driven cost‑of‑living shock, not an overheating demand story.
With confidence sliding and firms “bunker[ing] down”, they warn that “Raising interest rates is tone deaf, and potentially reckless.”
They also warn that, in this environment, a fragile ceasefire in the Middle East has done little to stabilise conditions, with oil prices whipsawing and uncertainty around a possible diesel shortage keeping households and businesses on edge.
Weak growth, slack labour market
Kiwibank highlights a string of soft indicators: unemployment at 5.4%, underutilisation at 13%, annual wage growth of around 2%, and GDP expanding just 1.3% over 2025. Inflation has eased to 3.1%, well below the 7.3% peak seen after COVID, and the bank expects it to fall back towards 2% by 2027.
In that context, the economists see “little risk of inflation becoming imbedded in the economy through wages” and expect economic activity to contract in the current quarter. They note that key data – including Q2 CPI in July and Q3 figures later in the year – will only confirm the slowdown after RBNZ’s next decision.
Hold, don’t hike, say Kiwibank
Kerr and Turcu back the central bank’s stated preference to avoid knee‑jerk moves, saying the best course is to “watch, wait, and weigh up the facts once they have the information in front of them.” In their view, households and businesses “don’t need a rise in interest rates to dampen their demand – because this is not a demand story, this is not COVID.”
For advisers, that stance points to less upward pressure on mortgage rates in the near term, even as global risks keep funding costs volatile. A premature OCR hike, they argue, would risk repeating “past mistakes” and could tip already stretched borrowers into a deeper downturn.
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