Low rates now, but “quite a bit of action” coming
Westpac is flagging a brighter economic outlook for New Zealand – and a sharper interest rate cycle from 2027 – in its inaugural 2026 Economic Overview.
Chief economist Kelly Eckhold (pictured) says low interest rates, strong commodity returns, and a supportive exchange rate are expected to drive “above trend growth in 2026 and 2027.”
As a result, “excess capacity in the economy will be exhausted more quickly and…the output gap will be closed by early 2027.” Westpac expects the unemployment rate to move “noticeably lower and below 5%.”
The revised forecast comes as New Zealand’s labour market enters 2026 looking soft but slowly stabilising, with employment edging higher, unemployment around the mid‑5% range, and wage growth easing back toward 2%, giving the RBNZ some breathing space before lifting rates.
Inflation is still too high, but Westpac sees some relief ahead. Price pressures from 2025 – “especially higher food and petrol prices” – should ease as they “rise more slowly in 2026.”
However, underlying inflation “remains persistent” and will leave the Reserve Bank “progressively less comfortable in maintaining stimulatory interest rates as 2026 wears on.”
OCR likely on hold through 2026, then steady 2027 hikes
Westpac expects the Reserve Bank to keep the official cash rate (OCR) unchanged for most of 2026.
“We think the prospect of declining headline inflation will give the RBNZ cover to leave the OCR on hold for most of 2026 so they can take the maximum time to assess the strength and durability of the economic recovery,” Eckhold said.
But once policymakers are confident growth will endure, “it will be time to act and return the OCR to more neutral levels.”
Westpac sees neutral at 3.75%, above the RBNZ’s 3–3.5% range, meaning “there will be quite a bit of action required to even achieve neutral levels from December 2026.”
The bank now forecasts 25bp OCR increases at every meeting from February to September 2027, taking the OCR to 3.75%. From late 2027, it expects a slower pace of tightening, with “modestly restrictive interest rates of around 4.25%” needed to keep inflation near 2%. Westpac sees the OCR holding at 4.25% through 2028 before easing back to 3.75% in 2029.
2026 refix window before RBNZ hikes bite harder
For mortgage advisers, this profile suggests a window of relatively low, stable rates in 2026, followed by a clear upward bias in 2027–28.
With the labour market soft but improving, wage growth cooling, and multiple bank economists flagging earlier‑than‑expected tightening risks, advisers have a valuable opportunity in 2026 to lock in sustainable loan structures before the “quite a bit of action” Westpac expects from RBNZ in the following years.
See the full Westpac report here.
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