Source: ASB Bank
- ASB forecasts two more OCR hikes to 3.25% before Christmas as inflation proves more stubborn than expected.
- Fuel prices are delivering a fresh inflation shock, with annual inflation expected to dip slightly in Q3, before climbing back above 4% by year-end.
- Despite the economy growing 0.2% in Q2, households are yet to feel relief with unemployment at 5.6%, and house prices are expected to flatline in 2026.
ASB has lowered its growth outlook and raised its inflation forecasts, with higher fuel prices and a weaker New Zealand dollar expected to keep inflation higher for longer.
In ASB’s latest Quarterly Economic Forecast, Acting Chief Economist Kim Mundy says New Zealand’s economy is holding up, but households are likely to remain under pressure until 2027.
“If this year had a personality, it would be fickle. 2026 has kept holding out the promise of something better, then pulled away just as it felt within reach. As oil prices fell through the middle of the year, we had become increasingly hopeful that weaker Q2 growth was a brief hiccup.
“We now have a sense of déjà vu, with prices at the pump edging back towards their early-2026 highs and no clear path to ending the conflict.”
ASB expects the RBNZ to raise the OCR by a further 50 basis points this year to 3.25%.
“A key risk RBNZ will be monitoring is whether the high inflation environment starts to lift inflation expectations. If expectations become less anchored, the OCR may need to move above our current projection of 3.25% in 2027.”
Despite the shock, the economy has kept expanding. GDP rose 0.2% in the June quarter, following an upwardly revised 0.9% in Q1, driven by strong exports and construction. Goods export volumes were up 9% on a year earlier and services exports up 11%.
“The fact that the largest oil price shock in recent history hasn’t derailed recovery is significant. But growth remains narrow, and the oil shock has added more hurdles.”
The domestic side of the economy is a sticking point. Consumer spending fell in Q2 for the first time after six consecutive quarterly gains, as households pulled back on discretionary purchases. ASB expects a modest rebound in Q3, but the combination of high fuel costs, a soft labour market and rising interest rates will keep households cautious.
“Households are likely to remain cautious for some time. As a result, growth is expected to stay uneven and be driven largely by export demand until pressures on domestic demand begin to ease, which we expect in 2027.”
Unemployment hit an 11-year high of 5.6% in Q2, and ASB expects it to stay in the mid-5s until late 2027. Labour remains easy to source due to elevated unemployment, underemployment and youth struggling to find work. With the RBNZ focused on inflation and firms facing uncertainty and cost pressures, a durable recovery in labour market conditions is unlikely before mid to late 2027.
House sales have retrenched to levels last seen in mid-2024, and buyers have plenty of choice and time to decide. ASB expects house prices to largely flatline in 2026 before rising by 3.5% in 2027. It may be late 2029 before national prices approach their 2021 peaks.
“Structural shifts, including slower population growth, the likelihood of a less borrowing led cycle and a more responsive supply of new housing, point to a more moderate cycle than New Zealanders are used to. That’s good news for affordability, but it also means a smaller wealth effect for households.”
ASB describes the outlook as more uncertain than usual. The main risks are a further swing in oil prices, a possible super El Niño for the rural economy, and stronger than expected population growth if departures to Australia slow. The general election on 7 November also adds uncertainty.
“If 2026 has taught us anything, it’s to plan for the worst, but hope for the best.”