Business and consumer confidence had now lifted and jobs growth should follow, Eckhold said.
Westpac is picking unemployment to gradually fall from 5.4% to around 4.7% by the end of 2026 and to 4.4% over 2027.
Inflation is expected to drop back over 2026 as earlier large increases in the prices of volatile items like food and petrol moderate.
Annual Consumers Price Index inflation is currently outside the Reserve Bank (RBNZ) target band at 3.1%.
However, rather than falling to low levels, it was expected to linger above 2% over the coming year.
“We have continued to see large increases in a range of administered costs, like council rates, electricity charges and health insurance,” Eckhold said.
“There are likely to be further large increases in these and other areas, limiting the downside for overall inflation.”
That has prompted Westpac to shift its outlook for interest rates. It now sees a rate hike in December as likely.
“The high starting point for headline inflation and core inflation implies no real chance of OCR [Official Cash Rate] cuts and a time limit for the current very stimulatory 2.25% OCR,” Eckhold said.
“By late 2026, it will be clear that the economy has been growing at an above-trend pace for some time, with an associated building of medium-term inflation pressures.”
The OCR would begin to rise in late 2026, with the pace of policy tightening increasing in 2027 to return interest rates to neutral levels more quickly, he said.
“The OCR will likely rise above neutral (which we estimate to be 3.75%) in late 2027.”
The length of time it was taking to gain confidence about the recovery implied that monetary policy would need to be slightly restrictive over 2028, Eckhold said.
Westpac chief economist Kelly Eckhold.
“An OCR peak of 4.25% looks likely to remain in place over 2028 before returning to neutral in 2029.”
In the medium term, business conditions were likely to continue improving.
“We expect the growth in business investment to be particularly strong in sectors linked to agriculture, with confidence running high on the back of strong export prices,” Eckhold said.
“Software investment is expected to pick up in the coming years, although the likely degree of uptake of AI [artificial intelligence] in New Zealand is uncertain.”
Westpac is picking house prices to rise by around 4% in 2026 and 5% in 2027 as demand gradually catches up with housing supply.
“GDP is expected to be noticeably above trend in 2026, which would normally drive above-average house price growth,” Eckhold said.
“The unemployment rate will fall, boosting incomes and helping housing demand in the major urban areas. But we expect a much more muted than usual reaction in house prices to the broader economic recovery, as significant stock is available for sale.”
Increases in planned residential building implied a robust supply of new houses through 2026 and 2027. Population growth had also been muted.
Westpac expects net migration to lift to around 30,000 people this year, as improving economic conditions make New Zealand more attractive for both locals and migrant workers, with a lift in arrivals under the Parent Boost Visa.
Liam Dann is business editor-at-large for the New Zealand Herald. He is a senior writer and columnist, and also presents and produces videos and podcasts. He joined the Herald in 2003.
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