Economic Outlook: Westpac Forecasts Cautious Recovery as RBNZ Eyes Further Rate Cut
Westpac’s latest Economic Overview provides a mixed but largely optimistic picture of New Zealand’s financial health. The report suggests that while some uncertainty remains from developments in US trade policy, the country’s economic recovery is continuing to unfold as expected. The bank’s Chief Economist, Kelly Eckhold, forecasts that the economy will gradually strengthen in the coming quarters, driven by high export commodity prices and lower borrowing costs for homeowners and businesses. This recovery is expected to bring the unemployment rate to a peak of 5.3% by the end of the year before it begins to decline in 2026.
One of the most significant developments is the forecast for a further reduction in the Official Cash Rate (OCR). Westpac is anticipating the Reserve Bank of New Zealand (RBNZ) will cut the OCR by another 25 basis points at its upcoming August meeting, bringing it down to 3.0%. This would be the lowest point in the current cycle and is a direct response to the RBNZ’s efforts to manage inflation and stimulate economic growth. The cut is expected to provide some much-needed relief to mortgage holders and encourage business investment, although the bank cautions that inflation is still expected to remain near the top of the 1-3% target band in the near term.
The report also highlights the positive impact of the government’s “Investment Boost” policy, which is encouraging businesses to bring forward their investment plans. This, combined with a gradual recovery in tourism and a strong primary sector, is expected to see domestic spending gather pace. Westpac projects that annual GDP growth will strengthen to 2.4% this year and rise to around 3.1% in 2026. This positive outlook, however, is not without its risks. Global economic factors, particularly the ongoing trade protectionism, could still impact New Zealand’s recovery if the global economy underperforms.
Despite the positive signs, the report also notes that the economic recovery has been uneven. While some parts of the economy are performing well, business and consumer sentiment have soured in some quarters, raising questions about when a broader and more sustainable pickup will occur. The report acknowledges that the Reserve Bank needs to be cautious in its easing of monetary policy, as a period of higher near-term inflation could feed into inflation expectations. This delicate balancing act will be a key focus for the RBNZ as it charts the path forward for the country’s monetary policy.
Overall, the Westpac Economic Overview paints a picture of an economy on the road to recovery, albeit a slow and steady one. The anticipated OCR cut and strengthening GDP figures provide a welcome sign for many New Zealanders, but the report serves as a reminder that the country is not yet out of the woods. The performance of the global economy and the RBNZ’s careful management of inflation will be critical factors in determining the pace and sustainability of this recovery in the months ahead.
