Introduction to Economic Recovery
The economy of New Zealand has been through a significant series of interest rate hikes, starting from 0.25% in October 2021 to 5.5% in May 2023. This drastic change has led to an artificially induced recession, leaving many wondering how long it will take for the economy to recover. The Reserve Bank began cutting the Official Cash Rate in August 2024, marking the beginning of the end of the hiking cycle. However, the question remains: how long will it take for the economy to get back on track?
Understanding the Impact of Interest Rate Hikes
The speed and size of the interest rate hikes were unprecedented, making it an experiment of sorts. Economists had no real comparisons to draw from, and as a result, the outcome was uncertain. The hikes led to a recession, and now the economy is slowly recovering. However, the recovery has been slower than expected, and economists are still trying to understand the reasons behind it.
The Human Factor in Economic Recovery
One major factor that contributes to the slow recovery is human behavior. When people get worried, they stop spending money, which in turn affects the economy. This is a simple yet reasonable guide to understanding what has happened in New Zealand’s economy. The pick-up in activity seen in the December 2024 and March 2025 quarters can be attributed to a ‘relief rally’ brought about by the realization that interest rates were decreasing.
The Effect of Interest Rate Cuts on Mortgage Payments
The cut in interest rates does not immediately translate to lower mortgage payments. According to the Reserve Bank’s monthly yields-on-loans figures, even though banks began cutting their advertised mortgage rates, the overall yield on their books of mortgages was still rising. It has taken time for the yield figures to drop, but as they do, more money becomes available to spend. As of July, the yield on the banks’ total mortgage book was 5.55%, down from a peak of 6.39%.
The Road to Recovery
The economy is expected to start growing again in the current quarter, albeit slowly. The December quarter is likely to be stronger, according to most economists. However, it is taking a while for the economy to recover, and it is essential to consider whether the current strategy of using interest rates to control inflation is the most effective approach.
The Need for a New Approach
The Reserve Bank’s use of interest rates to control inflation has worked, but it has come at a cost. The sharp rise in interest rates has affected many people, particularly those with mortgages. It is essential to consider whether there are alternative approaches that could be more effective and less harmful. The current strategy of relying solely on interest rates may not be the best approach, especially in a world where inflationary shocks are likely to become more frequent.
Conclusion
In conclusion, the recovery of New Zealand’s economy from the series of interest rate hikes has been slower than expected. The human factor, interest rate cuts, and the effect on mortgage payments have all played a role in the slow recovery. As the economy starts to grow again, it is essential to consider whether the current strategy of using interest rates to control inflation is the most effective approach. It may be time to explore alternative approaches that can help mitigate the effects of inflationary shocks without driving the economy into recession.
