“I saw your recent columns where you mentioned ‘green shoots’ – a term I try to avoid but a great subject to look at right now,” Ranchhod writes.
“Rather than ‘green shoots’ my preferred cliche is ‘It won’t happen overnight, but it will happen!’
Satish Ranchhod, senior economist at Westpac Bank. Photo / NZME
“There is one particular indicator I look at that doesn’t get a lot of attention, which I think is a key gauge of whether conditions in the New Zealand economy are changing. It’s household spending on interest costs, which has been falling since the start of this year.”
Ranchhod highlights a Stats NZ table measuring the total amount of household spending on interest costs.
While the lag has been well documented, not least by the RBNZ itself, the table shows just how slow the Reserve Bank rate cuts have been to pass through to people’s pockets.
The peak in debt-servicing costs for households was only reached in the December quarter last year.
And even though we’ve had 300 basis points of cuts (taking the OCR from 5.5% to 2.5%), debt-servicing costs have only fallen to about the same level as they were in March 2024, when we were headed into a very deep recession.
Based on these numbers, it shouldn’t be surprising that the recovery didn’t manage to gather any real momentum earlier this year.
The good news, though, is that this means there are still billions of household savings to wash through the economy in the coming months.
Hence, Ranchhod’s Rachel Hunter-like confidence.
NB: (For younger readers ) It won’t happen overnight, but it will happen is a line from Hunter’s famous Pantene shampoo commercial.
Looking forward
The Stats NZ data only goes out to June 2025.
But Ranchhod has looked at more recent data from the RBNZ, which shows that the average mortgage rate that households are paying has fallen another 30bps in the three months to September, and it’s now down more than 100pts since it peaked last year.
Combining RBNZ data on the average mortgage interest rate and Stats NZ’s data, he forecasts that debt servicing costs will reach a low point late next year, at around the levels they were in the September quarter of 2022.
“Importantly, we’re only partway through the re-fixing process,” Ranchhod said.
The process has been slower than usual – and than many expected – because more mortgage holders had stayed on expensive shorter-term and floating rates, with the aim of locking in later to get a long-term bargain.
“However, increasing numbers of borrowers are now rolling on to much lower interest rates. Over the next year, 75% of all fixed-rate mortgages will come up for repricing, with most of that coming in the next six months.”
While interest rates have fallen a long way, only about 60% of those falls had passed through to households by the end of September, he says.
“There’s still about 40% of the fall in interest rates that will pass through to households over the coming year.”
That could equate to more than a billion dollars worth flowing to New Zealand households.
That stimulus was effectively already “baked in”, he said.
“Compared to this time last year, one-year fixed mortgage rates are around 150bps lower, while two-year fixed mortgage rates are around 250bps lower than in 2023.”
For the record, Westpac – and all the other major banks (so far) – are forecasting we’ll get another 25-basis-point cut when the RBNZ meets next Wednesday.
That will take the OCR to 2.25%. That should, hopefully, be enough to keep the economy on a roll in 2026.
Last rate call
I’ll look at expectations for the last Monetary Policy Statement of the year on Monday.
It will also be the end of an era as the last outing for acting Governor Christian Hawkesby.
New Governor Anna Breman steps into the role at the start of December.
Hawkesby steps down after almost nine months as Acting Governor.
He has been with the RBNZ since March 2019, and was deputy governor from March 2022.
Acting Reserve Bank Governor Christian Hawkesby at his OCR press conference in Wellington in May. Photo / Mark Mitchell
As well as another rate cut next Wednesday, we can look forward to some new forecasts and interesting commentary about how the RBNZ is seeing the state of the recovery.
Green shoots review
Last week, I previewed a whole stack of second-tier data that was expected to offer some clues to the start of the recovery.
We had numbers for electronic card spending, immigration and tourism.
We also had the Performance of Services Index, the Performance of Services and the Selected Prices Index.
So how did it all land? To be honest, not great.
The green shoots haven’t withered, but haven’t shown much sign of growth either.
Card spending was up – but only just.
Spending in the retail industries (compared with September 2025) increased just 0.2% by value.
Total retail spending was up 0.8% from October 2024. The gain was almost entirely related to increased spending on groceries.
Tourism is continuing its slow but steady grind back to pre-Covid levels.
Migration data shows the number of Kiwis leaving has probably peaked, but net migration remains at historically low levels and will continue to be a headwind for things like house prices.
REINZ data out on Monday backed that up. Sales were up 5.5% (seasonally adjusted), but prices remained flat (technically down 0.1%).
Manufacturing versus services
As well as the two-speed, rural-urban divide, there are other gaps opening up in the pace of the recovery.
Confidence surveys have shown businesses are more optimistic than consumers.
And the manufacturing sector is more upbeat than the services sector.
The services sector in New Zealand continues to exhibit contraction, according to the BNZ – BusinessNZ Performance of Services Index (PSI) released on Monday.
Although it rose 0.4 points in October, the index remained below 50 (48.7), which indicates it is still going backwards. It has now been in contraction for 20 consecutive months.
“If one was trying to find any positive traces in a still broadly weak sector, the activity/sales index rose to its best outcome since January this year and its second-best month since February last year,” said BNZ’s Senior Economist, Doug Steel. “But 48.9 is not strong.”
A more substantial uptick and a move into positive territory in this measure will represent a significant green shoot when it finally happens.
Manufacturing looks better. It is expanding. The seasonally adjusted Performance of Manufacturing Index (PMI) for October was 51.4.
This was 1.3 points higher than September, but still below the average of 52.4 since the survey began.
“The lift to 51.4 from September’s 50.1 isn’t large, but it has moved the right way,” said Steel.
“The October result sees the PMI now boasting four consecutive months above the breakeven 50 mark for the first time in three years.”
Cost of living
There’s no doubt that cost-of-living issues are still causing pain in the economy.
This week’s Selected Prices Index looked ugly on the face of it.
But, overall, the indices which include food, power, accommodation, and travel (and represent about 46.5% of the full quarterly Consumers Price Index) were weaker than many economists were picking.
Food prices increased 4.7% in the 12 months to October. Higher prices for the grocery food group were the largest contributor, up 4.9% on an annual basis, while meat, poultry and fish were also up 7.6% over the year.
But the monthly figures weren’t too bad. Food dropped 0.3%, thanks largely to vegetables, which fell 10.7%.
Rental prices were flat, and there was a big drop in the cost of both domestic and international air travel (down 10.6% and 6.3% respectively for the month).
“Putting it all together, our weighted SPI index fell 0.1% (month on month), weaker than the 0.2% rise we expected,” said ANZ senior economist Miles Workman.
That put some downside risk into the fourth-quarter inflation expectations, he said.
ANZ is still expecting 0.4% for the quarter, for an annual rate of 2.9%.
Lower inflation is good news, not just because it means we’ll pay less for things.
But it will give the RBNZ confidence around next week’s likely cut and may even allow them to leave the door open for one more.
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. To sign up to his weekly newsletter, click on your user profile at nzherald.co.nz and select “My newsletters”. For a step-by-step guide, click here. If you have a burning question about the quirks or intricacies of economics send it to liam.dann@nzherald.co.nz or leave a message in the comments section.