The economy is likely to start recovering this summer from the Reserve Bank's enforced recession - but are there better ways of controlling inflation in future than pressurising those with mortgages?

So, how long does it take an economy to recover from a whole series of big interest rate hikes?

Well, longer than we would hope. 

That probably sums up New Zealand in 2025 as we begin to answer what was the key question (how long will the recovery take?) once the Reserve Bank began to cut the Official Cash Rate in August of last year, starting to reverse a hard-and-fast hiking cycle that took the OCR all the way from just 0.25% in October 2021 to 5.5% May 2023 - just 19 months later.

For me, the question of how long the economy would take to get properly rolling again after what was an artificially induced recession was always crucial. And it was never clear whether this shock was something that could simply be quickly shrugged off.

We now know that this all does take longer than we might have wished. And the hopes earlier expressed that because the economic downturn had been artificially engineered, this would see us pick up faster, well, no, seemingly not.

In July 2022, when the OCR was on 2.5% - and we were less than halfway to the peak of the hiking cycle, I noted that what we had embarked upon - because of its speed and the jumbo-size of some hikes - was effectively ‘an experiment’. It was unprecedented in terms of the size and speed. We had no real comparisons to draw on and therefore no real way of knowing exactly what might happen. We were guinea pigs.     

And while economists will probably continue to say the recovery has been ‘unexpectedly slow’ it increasingly looks to me like what’s happened is exactly how you should expect a recovery to look after a recession deliberately engineered by the central bank.

Perhaps if we want to quibble a bit, we can throw in the wild card that was the uncertainty around tariffs. That probably played a big part in the paralysis and ‘stalling’ we saw in the June quarter.

Once again, it seems that instead of behaving like economic models, human beings have…well, behaved like human beings.

And it's the human factor that always gets lost in the economic forecasting. The fact is, when humans get worried they stop spending cash - and that brings the shutters down on the economy. Now, what I've just said is very simplistic, but it's a reasonable guide to what we've seen rolling out this year.

I think we were too easily fooled by the pick-up in activity seen in the December 2024 and March 2025 quarters. A lot of this can probably now be seen as having been a kind of 'relief rally' brought about by the realisation that interest rates were on the way down again.

It all takes time

But the fact of interest rates being cut doesn't immediately translate to lower mortgage payments. We can tell that from RBNZ's monthly yields-on-loans figures. Even though banks began cutting their advertised mortgage rates well before the RBNZ began the OCR cuts in August last year, the overall yield on their books of mortgages was still rising, peaking in October before starting to fall only slowly. 

The overall yield figures are dropping meaningfully now, but, it's taken time. As of July, the yield on the banks' total mortgage book was 5.55%, down from a peak of 6.39%. It will continue to drop - and as it does then so more money becomes available to spend.

So, after the 'relief rally' of late last year and early this year, we saw the reality of that lag in mortgage rate falls - and then undoubtedly the worries about tariffs. And hence, the economy stalled again.

But as we head toward the final quarter of the year, I think we now can say with more confidence that NZ Inc is on the mend, even if looking way back at the June quarter GDP figures - ridiculously just released this week - would, at first flush, dent that confidence.

Most economists think that economic growth will have started again in the current quarter that's just about finished - albeit that it won't be flash. But the December quarter is likely to be a bit stronger. That's the belief.

It is all taking a while, though, isn't it? 

Remember, the RBNZ started hiking interest rates towards the end of 2021 to fight surging inflation. Inflation then peaked (at 7.3%) in mid-2022, only slowly coming back under control, and back into the 1% to 3% target range towards the end of 2024.

Squeeze it till it hurts

The RBNZ kept squeezing harder and harder on the OCR pedal in order to suffocate the inflation, and this was only really duly done after we fell into recession.

It took a long time to rein in the economy, and now it's taking a fair while to get it started again. 

Surely at least part of the problem is that the weapon of choice, the OCR, directly affects only those with mortgages. According to RBNZ estimates, only about a third of us have mortgages. So, it means a good number of us are not directly affected. Now, yes, there's various flow-on impacts that do affect everybody, but it takes time.

What we have seen with the OCR hiking cycle in 2021-23 and the subsequent easing from last year onwards is that outsized interest rate movements have been required to get the desired effect. 

I'm not sure how some people have managed during what was a very sharp rise in payments, but Kiwis are a phlegmatic bunch - and many people are likely to have struggled more than they've let on.

Other people, without mortgages, would not have been affected in anything like the same way and that surely is why it seemed to take so long for the OCR hikes to really 'bite' on inflation. Indeed, I think there's some reason to believe that it was only when we got to last year and that the mood of the country became sufficiently downbeat, that those who didn't need to stop spending, did in fact stop spending. Just that human reaction thing again. And that's when all the air came out of the tires and inflation was down. And so was the economy.

What about another way?

As the economy does surely now start to pick up again over summer, the RBNZ will be able to point to the OCR hiking cycle having ultimately done the trick against inflation.

But just because something does, after a fashion, work - well, that doesn't mean it's the only or best way. 

I can't pretend I have some magic solution in mind that might work better than the OCR for controlling inflation. 

I do, however, think that we can't just say the past OCR hiking cycle has 'worked' without asking if it's something we really wish to repeat.

And I do think we need to give thought to this, because whatever's happening with inflation right now, my suspicion is that in future we are globally likely to be more susceptible to inflationary shocks than we were for that long period leading up to the pandemic.

Do we really want to be driving ourselves into recession every time there is an inflationary shock?

It might be time to come up with something more creative than 'whack the mortgage payers' as a strategy to beat inflation.