Analysis: As Matariki rises, so too does Aotearoa’s benchmark interest rate. The Reserve Bank has increased its official cash rate by 25 basis points to 2.5 percent, assuring New Zealanders that the slowing impact of higher interest rates can be sustained by long-awaited growth in the economy.
But where is this growth? The coalition Government has been promising it ever since it was elected in 2023. Tomorrow will be a sunny day. Always, tomorrow.
Yet annual growth declined steadily from Sept 2023 through to June last year, and only just snuck back into positive territory in the March quarter of this year. The June quarter is expected to be flat or even decline again.
Reserve Bank Governor Anna Breman says: “Wage growth remains modest.”
No kidding, that’s an understatement. A report out this week from the OECD shows New Zealanders’ real wage growth has been right at the very bottom of the rankings over the past five years, at minus 6.4 percent.
We’ve suffered a steeper fall in after-inflation wages than any other developed nation. And that’s continued over the past 12 months.
“Real wages have regained some of the lost ground in virtually all OECD countries,” the OECD Employment Outlook 2026 says. “Real wages are near the trough of the cost-of-living crisis only in NZ and Australia.”
NZ suffers steepest fall in after-inflation wages in OECD
Given that unemployment numbers are up and fuel prices are down, the threat of a sustained rise in core inflation seems to have eased a little since the last interest rates decision in May. So why is the Reserve Bank monetary policy committee hiking interest rates now, when it didn’t do it in May?
Breman says there are three reasons:
1 / Although headline inflation pressures have eased, the effects of the Middle East conflict will linger for some time, so there’s a risk of more persistent underlying inflation;
2 / Wholesale interest rates and the NZD exchange rate have eased, meaning Reserve Bank monetary policy has to do more of the heavy lifting;
3 / The outlook for economic growth is looking “considerably stronger”.
“Lower fuel prices, monetary policy that is still accommodative, and a strong export sector are expected to support growth over the coming quarters,” Breman argues. “From our perspective, inflation is also hurting growth, and we need to get inflation back down to be able to also see stronger growth, and the stronger labour market going forward.”
This is a circular argument – but that’s monetary policy for you. The Reserve Bank is raising interest rates to slow inflation. By slowing inflation, it expects to encourage growth. Accelerating growth enables it to raise interest rates.
This isn’t a criticism; more, a truism. And the monetary policy committee has done what it can to ensure it hears the needs of business and the community firsthand, rather than just relying on reams of economic data.
Members met with Kiwi business operators in early June, prior to the US-Iran Memorandum of Understanding. These meetings indicated that economic conditions remained highly uneven across sectors and regions. Exporting sectors, such as agriculture and tourism, remain strong, but discretionary retail spending and construction remain weak.
The Governor was met with scepticism when she joined the refrain of ministers singing of growth to come. This does seem optimistic.
But on the first of her three grounds for raising interest rates, she’s been quickly vindicated. The Middle East conflict will indeed linger.
Today, Donald Trump has said that as far as he’s concerned, the ceasefire with Iran is over. He’s called Iran’s leaders “scum” and ordered a new round of air strikes. The global markets responded. Share prices are down, and the price of Brent crude oil has risen today, by US$3 a barrel.
The worry is that a continuation of the war will block the Strait of Hormuz and prevent the delivery of crude from the Persian Gulf to customers worldwide. That could worsen inflation, which economists had expected would ease with oil prices, AP reports.
This will in turn force the Federal Reserve and other central banks to raise interest rates – so in its decision yesterday, the Reserve Bank of New Zealand will not be an outlier.
For businesses and mortgaged households frustrated at the economy’s failure to deliver on promises of growth, this week’s rates hike will be hard to swallow.
But the Reserve Bank has made the mistake before of moving too slowly. A persistent rise in core inflation is again threatening – and Breman can’t afford to make the same mistake as her predecessor.
Higher fuel prices remain the main risk to inflation, she tells RNZ, as they’re a key cost driver for many businesses.
“The conflict did persist for such a long time – and as we can see over the past 24 hours, unfortunately, it’s not gone yet. That means there’s a risk this will become embedded,” she says. “Our job is to ensure that it’s not allowed to keep inflation too high for too long.”
