The New Zealand Institute of Economic Research (NZIER) has conducted a survey of economists, presenting important forecasts for the country. The annual GDP growth is expected to drop by 1.1 percent by March 2025, before bouncing back to 1.9 percent the next year.

Economic Growth Boost

Lower interest rates are likely to help the economy grow. Although the job market is weak, leading families to be cautious, many will benefit from lower mortgage payments. This financial relief could result in increased spending on non-essential items in the coming years. Inflation is anticipated to stabilize around the Reserve Bank of New Zealand’s target of 2 percent.

Monetary Policy Implications

In simple terms, after a short decline, we expect modest growth in the next 12 to 18 months. The predicted 1.1 percent drop in annual GDP by March 2025 shows the effects of tight monetary conditions and lower demand at home. It indicates overall less economic activity: fewer goods produced, reduced spending, and less investment. However, forecasts hint at a positive change. A 1.9 percent growth the following year may not be outstanding, but it signals a turnaround. This growth largely depends on lower borrowing costs, which should occur if interest rates decrease as expected. We’re entering a phase where reduced official rates may lower banks’ lending rates. If this happens, households will have more disposable income, primarily through lower mortgage payments. This typically boosts confidence, leading to increased spending on non-essentials. The halt in tightening measures also benefits small businesses relying on short-term loans. However, caution remains. The cooling job market, characterized by fewer openings and stagnant wages, makes people more careful about spending. If workers are worried about job security, they may not spend freely, meaning any increase in spending from lower rates could be gradual. Looking at inflation, it’s projected to stabilize around 2 percent, aligning with official targets. This suggests a steady decline toward a more stable level, without sudden drops or erratic changes. For those monitoring derivatives markets, this points to decreased price volatility, especially in medium-term rate trades. Given these forecasts, reactions in longer-term rate products might become clearer than in recent months, particularly as short-term rates approach their turning point. We will closely consider expectations moving forward, not just in the broader economy but also in guidance shifts and timing indicators. Those involved in options trading should also monitor implied volatility levels as rate expectations stabilize. It is highly likely we will see a drop in risk premiums for near-term contracts. Low inflation combined with expected rate cuts typically lowers those premiums. The NZIER outlook is based on current data and a measured timeline. There are no immediate signals suggesting a change in monetary policy before the year’s end. However, the implications for trades sensitive to delayed recoveries or changes in consumer confidence are significant. Create your live VT Markets account and start trading now.

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