Source: Radio New Zealand
Kiwibank’s 2026 outlook notes that the Reserve Bank is currently “at the centre of some confusion”. RNZ
Miscommunication from the Reserve Bank has driven interest rates higher than they should be, Kiwibank economists say, but they expect the economy to recover next year, anyway.
Kiwibank has released its outlook for 2026, noting that the Reserve Bank is currently “at the centre of some confusion”.
Wholesale rates have lifted since the bank’s last official cash rate announcement, even though it reduced the rate.
It was firmer than some had expected in its view that rates would not have further to fall.
The resulting increase in swap rates led to Westpac and the Co-Operative Bank increasing what they charge some fixed-term home loan borrowers.
Kiwibank economist Sabrina Delgado said the issue could be easily addressed by the Reserve Bank, when it made another announcement in February.
“Ultimately, it’s a bit annoying and premature to be seeing financial conditions tightening, and it’s frustrating, because it is coming from another misstep from the Reserve Bank,” she said.
“Although the Reserve Bank 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.”
Kiwibank’s economists said the misstep “is all too familiar”.
“Over the last few years, the Reserve Bank have bounced around from being hawkish in November, dovish in February, hawkish in May and then dovish in August. There seems to be some seasonality to their mishaps.
The miscommunication in November, along with climbing wholesale rates and higher retail lending rates, suggest we may indeed get another dovish commentary in February.
“It’s silly, we know. At the end of the day, retail rates are in a lower bound, although not as low as they should be.
“The Reserve Bank can – and should – lower wholesale rates with the stroke of a pen in February or from a speech at any time.”
Delgado said it would not change her outlook for an improvement next year.
“For us, rate hikes are still a 2027 story. It’s just that markets were given a bit of a poor signal.”
She said unemployment was probably at its peak and employment growth should rebound from the middle of next year.
The housing market was likely to pick up too, she said.
“Sales are up 6 percent, compared to October last year, and where sales go, prices follow.”
Kiwibank expected house prices to rise about 2-3 percent next year.
“That’s not exactly shooting the lights out, but it is an improvement from trekking sideways over the last two years.”
The economy was likely to grow about 2.4 percent next year and about 3 percent the following year, they said.
This year was tipped to be the year of recovery, but it stalled mid-year.
They said that was for two reasons – the hit to confidence from US President Donald Trump’s tariffs and the fact the Reserve Bank kept interest rates higher than would support growth.
“It was only in October, that the Reserve Bank took the cash rate below neutral and into more stimulatory territory. For most of the year, policy remained restrictive.
“We won’t dwell on the Reserve Bank’s past mistakes though. It would take too much ink and paper, and we’re mindful of climate change.
“What matters most for the Kiwi outlook is that policy settings are now at levels which should encourage activity. A cash rate at 2.25 percent is more supportive of a solid recovery in 2026.
“Compared to last year, interest rates are meaningfully lower and they should stay low for a while yet.”
Delgado said they were excited for a broad-based recovery.
“We finally have all the right settings, with interest rates being at levels that encourage activity, we’re already seeing those markets for recovery now with everything on the table for a great year of recovery – we’ve got consumption up, business confidence firmer, the job market is stabilising, housing activity is starting to pick up.”
She said discretionary “fun” spending was already showing improvements.
“We’re also hearing from businesses they’re experiencing more activity and they’re feeling more confident with the outlook.”
She said the economy should normalise to something like its pre-Covid form, rather than the experience before the downturn, when there was a lot of fiscal and monetary policy stimulus.
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