Pressing Pause On Interest Rate Hikes. New Zealand Isn’t Alone

• The Reserve Bank decided to do the sensible thing and hold interest rates last week. Weak domestic demand has acted as a handbrake on inflation pass-through to date. We applause the pause, but continue to expect further data dependent rate hikes.
• Confidence data reveals a continued theme of cautious consumers and buoyant businesses. Inflation expectations remain relatively well anchored.
• The RBA is likely to hike this week, widening the rate differential with New Zealand to a whopping 210 basis points… if the RBA deliver on market expectations.

The Reserve Bank gave us an early Christmas present last week by keeping the cash rate on hold at 2.75%. It was an unexpected pause. Although we have been consistently singing from the dovish hymn sheet, urging the Reserve Bank to keep rates on hold, we thought they would hike last week. We continue to expect a 25 basis point hike to 3% before the year end. Their next decision is on the 9th of December. This view is echoed by Reserve Bank Governor Anna Breman, who attributes a “high” probability of a hike in December.

The Monetary Policy Review which accompanied the decision was nicely balanced. There was a mix of upside and downside risks acknowledged. And the decision was a 4-3 split vote. The committee did not differ in their ultimate view that rates need to go up. The disagreement was simply a matter of timing. They are keeping their options open to hike into restrictive territory if needed.

Advertisement - scroll to continue reading

We don’t believe the market reaction was especially strong. Yes, the Kiwi dollar tumbled after the initial shock. But some of those losses have been clawed back. And the implied market pricing for future interest rates did not pull back aggressively enough, in our opinion. If the Reserve Bank come out at their December decision and reiterate the same message for a third time, the market will need to unwind some of its pricing. A circa 4% OCR just doesn’t seem probable based on the current messaging. For a full breakdown of the Reserve Bank’s decision, check out our review from last week (https://www.kiwibank.co.nz/business-banking/thrive-hq/kiwi-economics/commentary-insights/applause-for-the-pause-as-the-rbnz-keeps-cash-at-275/).

Confidence data for October showed a continued divergence between businesses and consumers.

Business confidence ticked up by one point and reported past activity was up by four points. Expected future activity dropped, likely a reflection of fear and uncertainty around oil prices which continued their unrelenting rise over October. The manufacturing industry continues a stellar run, boasting the highest own activity outlook out of all industries surveyed.

Consumers aren’t feeling quite as cheerful as businesses, again. Consumer confidence dropped to a chilly 96.2 (where 100 is neutral) but remains well above the April lows. Interestingly, two-year ahead inflation expectations dropped to their lowest levels since March 2025 and house price expectations went the same direction. The Reserve Bank will be pleased to see this, given that well anchored inflation expectations fed into their rationale for not hiking last week.

Chart of the Week: The rise in business creation and cessation

The New Zealand economy is slowly recovering, but many businesses are still struggling to make it through the downturn.

Our chart this week compares new company incorporations against formal business failures, measured by company liquidations and receiverships. On one hand, entrepreneurial activity remains reasonably healthy, with company incorporations still sitting above their long-term average. On the other, insolvency activity continues to run well above normal levels, reflecting the lingering impact of weak demand, increased costs and squeezed cashflows.

Companies Office data shows liquidations and receiverships have been trending higher over the past two years and remain elevated relative to historical norms. Meanwhile, incorporations have begun to drift lower after the surge seen through the pandemic and immediate reopening period.

The divergence highlights a key feature of the current cycle. Businesses are still being created at a healthy rate, suggesting confidence in New Zealand's long-run prospects remains intact. But existing firms continue to experience a hangover from several years of tough economic conditions that have plagued us since 2023, alongside rising operating costs and subdued household spending. Formal insolvency processes typically lag the economic cycle, often occurring well after trading conditions have deteriorated. That lag is still playing out today.

Importantly, elevated liquidations should not be interpreted as an economy-wide collapse. New Zealand continues to record far more company incorporations than formal insolvencies each month, and the overall stock of registered companies remains near record highs. The latest Companies Office statistics show more than 750,000 companies on the register, with new incorporations comfortably exceeding liquidations and receiverships combined.

Read more here - https://image.communications.kiwibank.co.nz/lib/fe3b11757764047d731670/m/1/f2174992-b3dd-4bc2-a3b8-27cc241bc58f.pdf

© Scoop Media

Advertisement - scroll to continue reading