We've Recorded The Lows, Let’s Generate Some Highs. Bring On The Recovery. Here’s Our Outlook For 2026

• 2025 was a year of frustration for many. But the settings are about right, now. We have the makings of a recovery, and not just in a few areas, most will recover. And no, inflation is unlikely to be a threat.
• We think 2025 will mark the low in interest rates for this cycle. That’s good news. Risks of rate cuts outweigh risks of rate hikes, for now. Although, if all goes according to plan, interest rates will rise over 2026, as rate hikes come into focus later in the year. Wholesale markets are factoring in too many hikes, however, putting premature upwards pressure on retail rates.
• The housing market is forecast to recover in 2026. There’s a glut of supply, especially in rentals, that needs to be worked through. But we expect investor appetite to improve as first home buyers remain active. Lower rates should lift prices, eventually.

The song remains the same, but the settings are about right. We continue to forecast a robust recovery for the Kiwi economy. We’re growing in confidence as interest rates have been (belatedly) set at stimulatory levels. And we’re hearing more from investors, after a few years of conspicuous absence. Household budgets are improving, despite the heavy burden of higher prices on essentials. Our card data shows a spreading of consumption into more fun, discretionary spending. That’s a good sign. And business owners are starting to see a lift in activity. It’s not just confidence, it’s action. And no, we’re not worried about inflation. Recessions kill inflation. And that weed has had a proper dose of economic herbicide. Looking offshore, concerns around a reacceleration in inflation have eased. We like that.

The Kiwi economy may enjoy a period of above-trend growth. 2025 belonged to the external sector, the likes of agriculture and tourism. It’s an impressive feat considering that the rules of the global playground were being rewritten. But 2026 should be the year that the interest rate sensitive sectors play catch up. Sectors acutely affected by the demand destruction caused by high interest rates stand to gain the most from loose(r) policy settings.

We have all the ingredients laid out on the kitchen bench. A rebound in household consumption – check; a stable jobs market – check; an uptick in house prices – check; and firmer business investment – check. We expect the Kiwi economy to expand around 2.4% next year, and by around 3% in 2027 – if no adverse external shocks come about. Granted, that’s a big if.

When it comes to interest rate settings, we think we’ve found the low in rates. The RBNZ’s various guestimates of “neutral” (a Goldilocks rate that’s neither too hot nor too cold) gravitate around 3%. And at 2.25%, we’re at levels that matter. Levels that should relieve household budgets, entice investors to invest, and encourage businesses to expand and hire. It’s all about restoring demand and boosting activity across all four corners of the economy. We hope we have seen enough… enough to get the economy moving again.

It's not all easy and straight forward, however. The RBNZ is again at the centre of some confusion. More miscommunication from the RBNZ is complicating the pass-through of lower rates… but that can be easily addressed come February. Although the RBNZ cut rates, with the obvious intention of lowering retail rates for businesses and households, a higher-than-expected OCR track has catapulted wholesale rates higher. Traders are now factoring in rate hikes (no longer cuts) in early 2026. That’s way too aggressive and premature. The RBNZ’s miscommunication in November, along with climbing wholesale rates, and higher retail lending rates, suggest we may indeed get a dovish commentary in February. At the end of the day, retail rates are in a lower bound, although not as low as they should be. The RBNZ can (and should) lower wholesale rates with the stroke of a pen in February, or from a speech at any time.

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