The chief economist of NZ’s largest bank thinks the economy is well-positioned to recover but still needs an extra push from RBNZ

ANZ’s chief economist, Sharon Zollner, expects interest rates to fall further than in the central bank's projections, which will be released on Wednesday afternoon.

Speaking at a post-budget breakfast with Prime Minister Christopher Luxon, Zollner said her team had recently started forecasting additional cuts to the Official Cash Rate.

“We put in a couple more cuts, one on sort of confidence headwinds from the tariff turmoil, and then another 25 points, because anything to do with the housing market or consumers has just been a bit stuttering lately,” she said. 

“It's been a bit stop-start. So, we thought maybe the country just needs a bit more of a push in the small of the back to make sure that we keep moving forward.”

Still, she expects the Reserve Bank to “play a straight bat” at its Wednesday meeting and not predict the OCR will fall to 2.50%, as ANZ currently forecasts. 

The benchmark interest rate is 3.50%. Consensus in financial markets is that it will be cut to 3.25% this afternoon, with a good chance of reaching a trough of 2.75% in November.

The RBNZ has previously suggested it would reduce the OCR to just above 3%, the midpoint of its estimated neutral range. However, those projections will be updated later today.

Zollner said the recent recession was caused by interest rates, so reducing them should be the solution, although it remains “clear as mud” how low rates will ultimately need to go.

While the economic recovery is still fragile, the private sector was well-positioned to begin investing again. A lot of public debt was raised during the pandemic, but firms and households were largely insulated.

This differs from the 2008 financial crisis, when the recovery was hampered by businesses needing to spend years paying off debt and repairing their balance sheets.

“That’s not the case this time. We’ve got a pretty clear slate for growth,” Zollner said.  

She said even the unemployment rate, which is likely to peak below 5.5% this year, isn’t uncomfortably high compared to previous downturns.

“That would actually be a relatively low peak, historically, in unemployment for the crazy cycle the economy has been through. But that's cold comfort for people who are affected.” 

‘Only just’ prudent

Zollner’s assessment of Budget 2025 might have also offered cold comfort to Luxon, sitting in the front row. It wasn’t austerity, she said, but rather “only just prudent.”

“The fiscal plan is to reduce debt towards 40%—just—it's only just there in the out-years. It is always easier to forecast it than to actually achieve it, of course.”

The Crown was also forecasting it would “miss its own targets” by returning to surplus a year later than planned, though it promised to save any upside revenue surprises.

“Essentially, the plan is to contain growth in spending and wait for the nominal economy to catch up and reduce the debt to income ratio that way.” 

Prime Minister Luxon responded, saying the Government had been dealt a challenging set of cards and had to play them as well as possible.

“As Sharon alluded to, we could keep our head in the sand, and politically, it's really easy to say, let’s keep spending money … or you can go into hard austerity and essentially throw the car into reverse and we ‘aint doing that either,” he said. 

“We are trying to find a middle way through. Yes, debt doesn't get corrected after the blow out from $60 billion to $180 billion … but we’ve got to find a pathway to bend that curve at the end of the [forecast] period”.