Source: Trend Analysis Network
New Zealand’s economy is showing signs of strain, and a growing body of evidence points to liquidity shortages and over manipulated interest rates as key culprits.
While global macroeconomic policies and domestic shifts play some part, the Reserve Bank’s aggressive interest rate strategy may have overcorrected, leaving the economy with limited liquidity.
The Reserve Bank of New Zealand (RBNZ) raised the Official Cash Rate (OCR) from a pandemic low of 0.25% to a peak of 5.5%.
This high rate was intended to tame inflation. Trend Analysis research demonstrated in 2023 that the inflationary measures were based on an over reliance of CPI (consumer price index) as a core indicator.
Research showed that prior to the GFC, CPI and other inflationary measures were effectively identifying real inflation. However, post COVID the macro-economy environment changed and most markets proactively began to hide inflationary indicators.
Prices had increased while goods delivered, the type and level of services, and manufactured products supplied to consumers saw substantive reductions in volume, scope, size, and quality. This hid core components of inflationary pressures.
Moreover, we noted in our earlier release “RBNZ Potential Catalyst Of New Inflationary Cycle” that although indexed inflation had cooled in some areas, debt based inflation was rapidly growing and the over tightening had unintended consequences.
Liquidity in financial markets has significantly declined, with investors and banks showing reduced appetite for risk and tightly managed credit extension.New research indicates that there is a lack of liquidity in the New Zealand economy. This liquidity crunch is not theoretical as it is playing out in the housing market.
Despite a significant drop in home prices since the pandemic peak, affordability remains elusive. In lower-cost regions, new homes (priced below national averages) require mortgage repayments that exceed reasonable thresholds for most households.
Even with large deposits, the 30-year mortgage repayments remain burdensome, especially as interest rates hover well above pre-pandemic norms. Such mortgage repayments based on current interest rates do not make financial sense to most potential buyers.
Additionally, we find that housing inventory is now rising at an unsustainable rate. There are over 36,000 properties for sale nationwide. Yet buyers remain hesitant because borrowing costs are remain so prohibitive.
This disconnect between price correction and repayment feasibility underscores the deeper issue: monetary policy has potentially throttled liquidity to the point of economic stagnation.
New Zealand’s economic decline appears to be a result of not merely a cyclical but a structural decline.
The over-manipulation of interest rates has drained liquidity, stifled investment, and distorted housing affordability. Moreover, it has induced a debt based inflation. One substantive example are regional councils that adjusted rates increases to compensate for increased borrowing costs reflected in the high interest rates.
Until monetary policy recalibrates to support sustainable growth, the economy will remain in a downward loop of suppressed demand due to constrained liquidity.
Trend Analysis Network is a think tank based in New Zealand created to identify and publish analytical results of future tr
