Interest rate rises may be needed by the end of next year

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The Reserve Bank is walking a fine line between kick-starting the economy’s recovery and overstimulating growth by the end of next year.

Wednesday, October 22nd 2025, 9:39AM 1 Comment

by Sally Lindsay

And Infometrics is forecasting the central bank to starting lifting the OCR  from 2.25% to 3% from December next year to April 2027.

While Infometrics is expecting the RBNZ to cut the official cash rate to 2.25% next month as it tries to boost consumer confidence and spending activity, chief forecaster Gareth Kiernan says, however, the full effects of this stimulus will not hit the economy until mid to late next year, and a new round of increasing interest rates is likely to be needed at the end of 2026 to get interest rates back to neutral.

He says by the time of effects of the stimulus are felt economic growth is likely to have already gathered sufficient momentum from strong export incomes and previous interest rate cuts.

“Economic growth will have accelerated to 2.3% a year by early 2027, with per capita growth comfortably above the 1.4% a year average recorded during the 2010s.”

Kiernan expects households to respond with stronger spending growth in the near term, and Infometrics also sees faster growth in business investment and residential construction in 2027.

Adding to the upside risks to economic growth during 2026 and 2027 is the government’s push to accelerate infrastructure delivery ahead of next year’s election.

The $6 billion of work expected to get underway before the end of this year has been well signalled and capital expenditure shapes as one of the few ways the government can contribute towards the faster economic growth it has been promising, he says. 

“Increasing infrastructure activity next year will be a sharp contrast to the past 18-24 months, which have seen declining public sector residential and non-residential construction and static infrastructure volumes.”

Some recent softening in dairy and horticulture prices, along with renewed US threats of steep tariffs on Chinese imports, mean a continued strong run for the export sector is not guaranteed, Kiernan says.

Nevertheless, Infometrics expects sufficiently strong export prices to underpin improved economic growth in provincial areas throughout 2026.

Any recovery in Auckland and Wellington will take longer to show through, due to difficult labour market conditions, weaker population growth, and in Wellington’s case, the effects of continued tight fiscal policy.

However, Kiernan says faster-than-expected economic growth over the next 18 months could start to stretch the economy’s capacity and create renewed inflationary pressures by the first half of 2027.

“An official cash rate of 4% by the end of 2027 to bring economic growth back to a more sustainable rate is not our central view, but it’s not out of the question either,” he says.

“There is an increasing chance that monetary policy is again overdoing the stimulus and exacerbating future ups and downs in the economic cycle.”

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