Interest Rate Rollercoaster: Why Today’s Lows Won’t Last
Despite potential further cuts in 2025, New Zealand homeowners and businesses should brace for a reversal of fortune. Forecasts from Infometrics suggest the current period of falling interest rates is a temporary reprieve, with increases likely from late 2026 as economic growth accelerates. This means the window to lock in lower rates is rapidly closing.
The Near-Term Dip: A Calculated Pause
The Reserve Bank is expected to continue easing monetary policy in the short term, with another rate cut anticipated next month, bringing the official cash rate down to 2.25%. This move, and a likely hold at that level through much of 2026, is intended to stimulate an economy that recently contracted by 0.9% in the June quarter. However, Infometrics chief forecaster Gareth Kiernan suggests these cuts may be somewhat unnecessary, given the strength of export prices and provincial economies.
This temporary stimulus is designed to bolster spending and investment. Kiernan anticipates stronger household spending, alongside faster growth in both business investment and residential construction in 2027. Government infrastructure spending, particularly in the lead-up to next year’s election, is expected to further fuel this acceleration.
Growth and the Inevitable Tightening Cycle
The projected economic rebound – with annual growth forecast to reach 2.3% by early 2027, exceeding the 1.4% average of the 2010s – is precisely why the Reserve Bank will likely need to shift gears. Increased economic activity inevitably leads to inflationary pressures, prompting a return to a tightening cycle. Infometrics predicts the official cash rate could rise to 3% in the first half of 2027, with a potential to reach 4% depending on various economic risks.
Understanding ‘Neutral’ Interest Rates
The goal of this tightening isn’t to stifle growth, but to bring interest rates back to what economists call “neutral.” This is the level that neither stimulates nor restricts economic activity. Finding this balance is crucial for sustainable economic health. A rate that’s too low can fuel inflation, while one that’s too high can trigger a recession.
What This Means for Borrowers and Investors
The forecast presents a clear dilemma for those with mortgages or investment plans. While further short-term rate cuts are likely, the long-term trend points upwards. Kiernan advises consumers to seriously consider fixing their mortgage rates while they remain low. This strategy could shield borrowers from the anticipated increases in 2027 and beyond.
Businesses, too, should capitalize on the improving economic conditions expected in 2026. Now is the time to plan investments and expansions, taking advantage of relatively low borrowing costs before they inevitably rise.
The Role of Export Performance
A key factor supporting the optimistic growth forecast is the performance of New Zealand’s export sector. Strong export prices, particularly in key agricultural commodities, are providing a significant boost to provincial economies. This resilience in the export market provides a buffer against global economic headwinds. You can find more detailed analysis of New Zealand’s export performance at Stats NZ.
Preparing for the Shift
The coming shift in monetary policy isn’t a cause for alarm, but it does require proactive planning. The period of exceptionally low interest rates is coming to an end. Those who anticipate and prepare for the inevitable rise will be best positioned to navigate the changing economic landscape. The next few years present a unique opportunity to leverage current conditions, but time is of the essence.
What are your predictions for New Zealand’s interest rates and economic growth? Share your thoughts in the comments below!
