“With the official cash rate forecast to reach 3.25% by mid-2025, the boost to household spending will reach $45 million a week by the end of this year,” said Kiernan.
That was equivalent to 1% of private consumption, as people continued to roll on to lower fixed mortgage rates.
“Over the next six months, close to half of all fixed-rate mortgages will come up for repricing,” said Westpac’s Ranchood in a report headlined “Squeeze to Ease”.
“For those borrowers who fixed up to two years ago, they could see their interest rate dropping by more than 100 basis points when they next refix their rate (depending on when they took out their mortgage and how long they fixed for).”
Those lower interest costs could have a dramatic impact on households’ disposable incomes, he said.
“For instance, suppose you have an average-priced house with 50% remaining on your mortgage. If you had fixed for one year at the start of 2024 and then refix for one year again now, your minimum monthly payments in most parts of the country would fall by around $300 per month,” he said.
“If you live in Auckland where house prices tend to be higher, that fall in debt servicing costs would be over $400 per month.”
Reason for optimism
“There’s reason for optimism about the New Zealand economy and business conditions over the next 24 months,” Infometrics’ Kiernan said.
Although economic growth is not forecast to get above 2.5% per annum during 2025 and 2026, the recovery would be underpinned by increased household spending, a more stable housing market, and strength in export commodity prices, he said.
“GDP growth averaging 0.5% per quarter during 2025 is not rapid, but it would be a marked improvement on the 0.0% flat quarterly average throughout 2023 and 2024,” he said.
Household spending had already shown signs of turning around in the second half of last year.
“Although people are likely to remain cautious with their spending in the near term due to the soft labour market, we expect more momentum in spending growth to emerge in the second half of 2025.”
By mid-2025, Infometrics expects the Reserve Bank will have finished cutting in this cycle and will be content to let the lagged effects of easing monetary conditions flow through the economy during the rest of the year and 2026.
The scope for further interest rate cuts was becoming more limited as the weaker New Zealand dollar, higher fuel prices, and concerns about more persistent price pressures internationally could raise inflation concerns.
But higher commodity prices for meat and dairy, alongside continued strength in horticulture prices, would flow into better economic conditions in provincial areas throughout 2025, he said.
Export prices had already been pushing higher over the past year, and the outlook for 2025 is looking positive, said Westpac’s Ranchhod.
“In particular, we’re forecasting a farmgate milk price of $10.00/kgMS this season,” he said.
“Combined with a lower New Zealand dollar, that will boost export earnings, which will help to support household incomes and spending.”
Consistent with that, Westpac had already seen retail spending firming in regions with a strong agricultural backbone like Southland, Otago, Northland and Waikato, he said.
However, Kiernan warned that expectations of stronger export incomes needed to be viewed in the context of heightened uncertainty about the global geopolitical and trade environment.
“US tariffs could undermine the growth in exports to the US that has been achieved over the last five years, as well as adding to the problems faced by the Chinese economy and hurting our export potential in that market too.”
Liam Dann is business editor-at-large for the New Zealand Herald. He is a senior writer and columnist, and also presents and produces videos and podcasts. He joined the Herald in 2003.
