Cost-of-living pain to keep shaping borrowing capacity and mortgage risk
New Zealand is seeing a renewed focus on purchasing power as households feel squeezed despite easing inflation, at a time when the Iran conflict is complicating the interest‑rate outlook and keeping wholesale funding costs volatile.
Speaking at the National Financial Advisers Conference 2026 in Auckland, Reserve Bank chief economist Paul Conway (pictured) said “the cost of living isn’t just about inflation or the price level – it’s about purchasing power” – what incomes can actually buy once higher prices are taken into account.
Why things still feel expensive for borrowers
Conway noted that “even though inflation has fallen from its highs, prices are now much higher than they were before the pandemic”, with overall prices up sharply since 2020. Recent Westpac and ASB analysis also points to higher fuel, food, and power costs pushing inflation back above target, raising the risk of higher‑for‑longer mortgage rates, adding to the squeeze on borrowers’ budgets.
Conway told delegates that prices in New Zealand are high by international standards, with overall price levels above the OECD average. Prices for some products – including construction and housing related services – are among the most expensive in the OECD.
Since the start of the pandemic, overall prices have risen by around 26%, while wages have increased by around 32%, leaving real wages modestly above pre-COVID levels. People who changed jobs were more likely to get pay increases.
Productivity, not just policy rates, to shape long‑term relief
Conway stressed that while monetary policy is central to stabilising inflation, it cannot, on its own, solve New Zealand’s cost-of-living challenge.
“Low and stable inflation is critical, but it’s not the whole story,” he said. “Monetary policy can anchor prices, but it can’t make New Zealand more affordable by itself. Lasting gains in purchasing power ultimately depend on productivity improvements, which allow wages to rise without pushing prices higher.”
Conway argued that “productivity growth is the most powerful driver of higher real wages and improved living standards in the long run”, and that stronger productivity would raise the economy’s speed limit, allowing faster growth without reigniting inflation.
Read the full speech here for more insights.
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