The impact of the Reserve Bank of New Zealand’s previous aggressive policy tightening—which was aimed at bringing down rampant inflation—is still working its way through the system. This is a key factor behind the country’s current economic difficulties. New Zealand has effectively been in recession for two years, with the step down in activity clearly manifesting in interest rate-sensitive sectors, the labour market, and inflation. Leading investment and spending gauges are pointing to below-potential growth persisting well into 2025, with unemployment set to trend higher, and price pressures receding due to greater ‘excess capacity’.

Economic weakness points to a further rise in unemployment.
Annual change in GDP per capita and unemployment rate, %
Q1 1995 – Q3 2024

Based on these challenging macro trends, we expect the central bank to continue its backtracking process, delivering a steady stream of additional interest rate cuts over the next few quarters as policymakers move settings from restrictive into accommodative territory.

In our opinion, the reduction in New Zealand’s interest rate advantage, coupled with vulnerabilities associated with funding its lofty current account deficit (nearly 7% of gross domestic product) could generate lingering headwinds, and see the currency underperform the Australian dollar through most of 2025.