Reflecting on a Dovish RBNZ

The RBNZ’s February economic outlook was a mix of optimism and pessimism. The implications are a higher bar for an early start to OCR increases and a bias towards a weaker exchange rate.

• The RBNZ’s economic outlook was a mix of optimism and pessimism.
• The medium-term growth outlook isn’t boosted much despite low interest rates and stronger recent data.
• Pessimism about the housing market and its impact on consumer spending is prominent in the RBNZ’s concerns.
• The implications are a higher bar for an early start to OCR increases and a bias towards a weaker exchange rate.

This week was dominated by Governor Breman’s inaugural outing at the release of a Monetary Policy Statement (MPS). The general tone of the message was notably more dovish than market expectations, even though the RBNZ still sees a December initial hike as likely (but not certain). But the subtext was a bit pessimistic, indicating the bar for an early rate rise remains high. This implies the balance of risk has tilted away from an interest rate rise ahead of the General Election on 7 November. This also likely embeds a weak tone for the NZD for a while.

In many respects, this week’s MPS was according to expectations. We had anticipated a cautiously optimistic view from the RBNZ on the economic recovery that culminated in a signalled first shift in the OCR towards the neutral zone right at the end of 2026. We didn’t expect the RBNZ to signal any chance of further easing in the interim and we didn’t expect the RBNZ to talk about a pre-election tightening. The RBNZ’s messaging – which was notably much clearer than has sometimes been the case in the past – met those expectations.

However, there were aspects of the RBNZ’s story that remain less optimistic – indeed, in our view, pessimistic given the current low level of interest rates. At a high level the RBNZ presented picture of a solid recovery through the next couple of years. Growth is expected to be around 2.8% over each of 2026 and 2027, which is solidly above trend growth and sufficient to eat up excess capacity eventually. However, the pessimistic overlay is that these forecasts were not any stronger than presented late last year before we saw a run of stronger economic indicators, including Q3 GDP itself.

The stronger growth indications we saw late last year are reflected in the RBNZ’s forecast of solid growth in the first half of 2026 (which was revised up marginally). But the RBNZ has scaled back its forecasts for growth in the second half of 2026 (from 1.5% to 1.2% over H2 2026). This means that although the output gap initially closes a bit more quickly in early 2026, it still doesn’t close fully until the end of 2028. It also means the path to lower unemployment is much slower than previously expected, so that the unemployment rate ends 2026 at a still elevated 5.0%.

This less optimistic view of the future, even given low interest rates, means inflation pressures are not seen as pressing and the urgency to raise interest rates is not great. This is why Governor Breman emphasized that market pricing of at least one OCR increase in 2026 was too aggressive. Indeed, she noted that in the MPC’s eyes, while a rate rise at the end of the year looks likely, it is hardly a done deal.

The key issue weighing on the MPC’s mind is the role that house prices will play in shaping the economic recovery. And this is an area where again the RBNZ took a very pessimistic view. To be certain, house prices have been flat or have fallen in seven of the last eight months. But the RBNZ took the view that recent momentum can be extrapolated into the whole of 2026 with just a marginal improvement in 2027. And that softness in house prices is expected to be a drag on households spending. In a year where economic growth is forecast to run at an above-trend 2.8%, house prices are forecast to be flat in 2026. This is a remarkable assumption remembering that in late 2025 the RBNZ thought house prices would rise around 3.8% in 2026 – even though back then the short-term economic outlook seemed less positive.

If the RBNZ’s scenario comes to pass it will be notable indeed as it’s usually the case that an improving growth path prompted by low interest rates, reduces unemployment and lifts household incomes, increasing the demand for housing and house prices. Considering the trends post the Global Financial Crisis, a year of 2.8% GDP growth would usually see house prices rise at least somewhat. Or looking at it the other way around, zero house price growth would normally reflect a much slower economy and growth closer to 1.5% y/y. If we see another year of growth as weak at 1.5% then it’s likely the output gap won’t close and unemployment rate won’t fall (indeed it could rise).

Such a scenario would ask hard questions of New Zealand’s growth potential and the level of the “neutral” interest rate. We don’t think that this would be consistent with neutral rates sitting in the 3-4% range (which covers the range of RBNZ and private forecasters assumptions) as it would be more likely that even a 2.25% interest rate isn’t really that stimulatory.

All of this is of course assuming no exogenous shock drives another weak growth outcome in 2026. No such shock is currently forecast – and indeed the RBNZ expects global growth over 2026 will be similar to 2025. The Governor did present a laundry list of downside risks coming from global issues. But none of these are impacting on the New Zealand economic recovery right now. And we don’t think they are weighing much on the policy outlook at the minute.

These pessimistic scenarios also ask hard questions of where the exchange rate is heading. As we have noted many times, foreign exchange is a relative game, and right now other countries are moving ahead of New Zealand. We shouldn’t see a very strong exchange rate at all if these more pessimistic scenarios come to pass. The situation seems particularly pressing versus the currently strong Australian dollar where interest rate expectations are firming. We are slightly revising down our view of the NZD/AUD exchange rate for the next 6 months given the RBNZ’s dovish views, to reflect the sense that that balance of risks for New Zealand interest rates have tilted away from a pre-election start to the tightening cycle. Ultimately, we remain optimistic the recovery will be stronger than the RBNZ fears. But this is not going to be settled until the second half of 2026 when the RBNZ and our forecasts start to significantly diverge.

In the meantime, the RBNZ’s focus on housing and the implications for household consumption growth will place a premium on house price data and consumer spending indicators. As noted, this week’s data on house prices confirm still flat prices and unchanged momentum. This week’s electronic card spending data was weaker than expected – but the data appears a lot weaker than card spending data produced by the banks, including our own indicator. Hence, we wonder if the Stats NZ data is somehow missing something as retail trends and the payments marketplace is shifting. Next week’s Retail Trade Survey for the December quarter will be interesting in that regard.