The last interest rate cut this cycle?

1. An awkward 3% for inflation – but don’t panic

Last week’s inflation/CPI figures were a bit awkward for the Reserve Bank, lifting to 3% in the third quarter – right at the top of the target band, yet they’ve been pressing ahead with official cash rate cuts anyway. However, there won’t be any panic, as the RBNZ had actually been expecting this result (the forecast from August’s Monetary Policy Statement was spot on). And with the economy still underperforming, inflation should drop back again in the coming months.

Looking beneath the surface, despite big increases in council rates and electricity prices, non-tradable or domestic inflation pressures have broadly continued to ease – such as property rents and the cost to build a new house. This means the recent rise in the overall measure has been driven to a large extent by the tradables or imported side of the equation. That includes our grocery bills.

As noted, however, domestic price pressures (maybe excluding council rates) should continue to abate, and things like food are also expected to flatten off – meaning overall inflation should ease downwards from here on, and it doesn’t preclude another OCR cut on November 26. That may well be the last drop in this cycle, as we all settle down and assess how the reduction in mortgage rates is feeding through to households’ spending behaviour and the wider economy.

2. The economy probably grew again in Q3

Speaking of the economy, there were further green shoots last week. In particular, the NZ Activity Index for September was up by 2.6% from the same month last year – the strongest figure since late 2022 and signalling perhaps a 0.5% lift in GDP in Q3 (when the figures are released on December 18). It’s still early days, but that’s encouraging news for an emerging recovery.

Cotality chief economist Kelvin Davidson: "A slowly recovering labour market is one reason why – for better or worse – modest house price growth is expected to resume in 2026." Photo / Peter Meecham

3. More FHBs at high LVRs and more investors at high DTIs

Meanwhile, mortgage lending activity continued to grow in September, coming in at $8.2 billion – around $1.6b or 25% higher than the same month in 2024. Within that total, bank switching or "refi" remains high (albeit down from the peaks in June and July), a rising share of first home buyers are getting in at low deposit (<20%) or high LVR – 51% of them in September; a new record high – and a greater share of investors are taking out loans at high debt to income ratios (>7). That figure was above 11% in September; still below the 20% cap, but the highest figure since January 2023 and definitely a trend to keep an eye on as 2026 approaches.

4. Is employment finally turning up?

Looking ahead, Stats NZ will publish September’s filled jobs figures on Tuesday this week. These figures are prone to downward revisions, so we need to be careful. But even so, there were hints of an upturn in job creation in August, so hopefully we’ll see more of that in September’s data. A slowly recovering labour market is one reason why – for better or worse – modest house price growth is expected to resume in 2026.

5. Looking for confidence to turn into activity

We’ll also get ANZ’s business and consumer confidence measures for October later this week. After the downer provided by the weak Q2 GDP result announcement in September, the 0.5% OCR cut earlier this month may well have bolstered sentiment. However, it needs to stick for a few months yet, and also then turn into real activity and spending.

- Kelvin Davidson is chief economist at property insights firm Cotality