WELLINGTON – New Zealand businesses are less pessimistic about the economy following the election of a centre-right government, amid signs that inflation pressures are easing, potentially allowing interest rates to decline.

A net 10 per cent of firms expect the economy will deteriorate in the next six months, according to a fourth-quarter survey published on Jan 16 in Wellington by the New Zealand Institute of Economic Research (NZIER). That is down from 49 per cent in the third quarter and leaves business sentiment at its brightest since the second quarter of 2021.

Fewer firms experienced rising costs, and the proportion who intended to raise prices fell for a fourth straight quarter, the survey showed. That may be good news for the country’s Reserve Bank (RBNZ), which warned in 2023 that surging immigration was a risk to its inflation outlook and said interest rates may go even higher in 2024 if necessary.

 ANZ Bank New Zealand chief economist Sharon Zollner said in a note: “The economy unexpectedly got some wind in its sails going into the end of 2023. The RBNZ will be pleased to see the decline in direct inflation indicators, but wary of the forward-looking indicators that suggest a risk that the economy may be getting a second wind before the inflation-fighting job is done.”

Reducing Costs

The October election of a National Party-led government that has pledged to deliver income tax cuts and reduce the cost of doing business has buoyed sentiment. The economic research institute’s analysis of its survey going back to 1970 showed that confidence was on average higher whenever the centre-right was in power.

In November, the RBNZ projected that inflation would drop into the 1 per cent to 3 per cent band it targets in the second half of 2024, but signalled it did not intend to cut rates until 2025. Since those comments, an unexpected contraction in third-quarter gross domestic product has seen investors bet the Official Cash Rate could fall to 4.5 per cent by the end of the year from its current 5.5 per cent.

NZIER principal economist Christina Leung told a briefing that the institute still expects the RBNZ to hold the OCR throughout 2024.

“It is a pretty encouraging picture for the Reserve Bank,” she said. “This report is providing signs that the next move is a cut, but certainly nothing to suggest that demand is falling off the cliff that would warrant concern enough to loosen monetary policy.”  BLOOMBERG