Business and consumer confidence had now lifted and jobs growth should follow, Eckhold said.<\/p>\n
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.<\/p>\n
Inflation is expected to drop back over 2026 as earlier large increases in the prices of volatile items like food and petrol moderate.<\/p>\n
Annual Consumers Price Index inflation is currently outside the Reserve Bank (RBNZ) target band at 3.1%.<\/p>\n
However, rather than falling to low levels, it was expected to linger above 2% over the coming year.<\/p>\n
\u201cWe have continued to see large increases in a range of administered costs, like council rates, electricity charges and health insurance,\u201d Eckhold said.<\/p>\n
\u201cThere are likely to be further large increases in these and other areas, limiting the downside for overall inflation.\u201d<\/p>\n
That has prompted Westpac to shift its outlook for interest rates. It now sees a rate hike in December as likely.<\/p>\n
\u201cThe 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,\u201d Eckhold said.<\/p>\n
\u201cBy 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.\u201d<\/p>\n
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.<\/p>\n
\u201cThe OCR will likely rise above neutral (which we estimate to be 3.75%) in late 2027.\u201d<\/p>\n
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.<\/p>\n
Westpac chief economist Kelly Eckhold.<\/p>\n
\u201cAn OCR peak of 4.25% looks likely to remain in place over 2028 before returning to neutral in 2029.\u201d<\/p>\n
In the medium term, business conditions were likely to continue improving.<\/p>\n
\u201cWe 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,\u201d Eckhold said.<\/p>\n
\u201cSoftware 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.\u201d<\/p>\n
Westpac is picking house prices to rise by around 4% in 2026 and 5% in 2027 as demand gradually catches up with housing supply.<\/p>\n
\u201cGDP is expected to be noticeably above trend in 2026, which would normally drive above-average house price growth,\u201d Eckhold said.<\/p>\n
\u201cThe 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.\u201d<\/p>\n
Increases in planned residential building implied a robust supply of new houses through 2026 and 2027. Population growth had also been muted.<\/p>\n
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.<\/p>\n
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.<\/p>\n