Introduction to New Zealand’s Economy
The Reserve Bank of New Zealand (RBNZ) has given permission to spend, but the question remains, will people spend, and what will they spend on? The RBNZ believes that people have money available to spend, but a lack of confidence is holding them back. This lack of confidence is a problem that needs to be addressed to get the economy moving.
The Impact of Interest Rates
The fast and furious rise in interest rates between late 2021 and 2023 has made it tough for some people. Those who bought during the pandemic frenzy of 2020-2022 and geared themselves up with mortgage rates that had a ‘2’ in front of them watched as the ‘2’s were replaced by ‘7’s. However, the latest monthly RBNZ figures on non-performing housing loans suggest that the worst is now over. Banks’ yields on the total mortgage book were down to 5.45% from a peak of 6.39% in October of last year, indicating that things are improving.
A Defensive Frame of Mind
A save, save, save defensive frame of mind has descended on the country. While this has been essential for some, it appears that a contagious mood has affected even those who could afford to spend. The RBNZ estimates that only about a third of the population has a mortgage, so two-thirds are not directly affected by interest rate hikes. The unemployment rate, at 5.2%, is worse than during the pandemic but has been worse in the past.
The Changing Savings Landscape
There has been a big change in savings since interest rates began to rise in 2021. RBNZ figures show that households had about $80.9 billion in term deposits in August 2021, which increased to $144.6 billion in August 2025. This means that over $60 billion more is ‘locked up’ in term deposits than four years ago. However, most of this money is not locked up for long, with 84.1% of total household deposits available within six months or less.
The Housing Market
The housing market is still suffering from a lingering hangover from the incredible 40%+ pandemic price surge. Some people may have ended up in a situation where their position is ‘untidy’ after buying during the pandemic frenzy. However, once house prices start rising again, more money will be attracted into the housing market. With an OCR of 2.25% by Christmas, house prices are likely to rise again soon.
A Risky Gamble
The RBNZ has taken a risk by deciding to push interest rates into a stimulatory level at a time when inflation is likely to break through the top of the 1% to 3% target range. The RBNZ is gambling on inflation being controllable and on people being ‘sensible’ with the extra money available at these lower interest rate levels.
Conclusion
The RBNZ’s decision to cut interest rates is a big ‘cheer up’ message to the economy. It’s hoping that people will start spending and making investment decisions again, allowing the economy to grow. However, there’s a risk that over caution could give way to recklessness, ending up in the same old story. The next few months will be crucial in determining whether the RBNZ’s gamble will pay off or not.
