By any realistic measure, New Zealand’s economy is no longer in the eye of the storm that buffeted households and businesses through 2021–2023. Inflation, interest rate spikes, and lockdown aftershudder have receded from the headlines. But according to the latest analysis released by Kiwibank — drawing directly on the Reserve Bank of New Zealand’s latest statements — the idea that “we’re through the worst” is only half-true. The pain of the inflation surge may have passed, but a more subtle and prolonged period of economic healing still lies ahead.
Inflation Isn’t Out of the Woods — But It’s Heading Down
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By the end of 2025, headline inflation in New Zealand finally sat within the RBNZ’s target band of 1–3%. That’s a major milestone. For years, spiralling prices for food, electricity, and council services had eroded household budgets and forced New Zealanders to tighten their belts. But the Reserve Bank and Kiwibank both now see inflation moderating further as the economy’s spare capacity gradually closes. The Bank has retained its Official Cash Rate (OCR) at 2.25 percent, signalling confidence that inflation pressures are abating without needing immediate rate hikes.
Yet this isn’t a declaration of victory so much as a cautious sigh of relief. Officials are quick to say the recovery remains in its infancy, and core inflation pressures continue to soften only gradually. In other words, the worst of the inflation burst may be behind us — but the economy is far from sprinting.
The Output Gap: A Key Drag on the Recovery
One of the most important concepts in macroeconomics is the output gap — the difference between what an economy could produce at full capacity and what it actually produces. A negative output gap means there’s slack: businesses aren’t using all their labour or capital, and demand is weaker than it might otherwise be.
Both the Reserve Bank and Kiwibank expect New Zealand’s output gap to remain negative for years to come, potentially all the way out to 2028. This suggests that despite headline improvements — lower inflation, stabilising prices, less dire household sentiment — the engine of the economy still isn’t firing on all cylinders. Growth is happening, but it’s uneven and tentative.
This is not a story of an economy bouncing back aggressively, but rather one gently working its way back toward health.
Household Strain Isn’t Fully Behind Us
Even as inflation cools, the everyday experience of many New Zealand households hasn’t suddenly gotten easier. Wage growth remains modest. Unemployment, while not skyrocketing, hasn’t collapsed either. Housing markets, long a source of both wealth and damage in New Zealand’s economy, continue to show weak price growth — neither plunging nor booming.
This reflects a fundamental reality: many households continue to feel cautious. Reduced consumer confidence tends to suppress spending, which in turn dampens business activity. That’s a drag on growth that doesn’t show up in inflation figures but shows up everywhere else.
Interest Rates: Not Rushing to the Exit
Some financial markets had been flirting with the idea that the RBNZ might soon start hiking the OCR again. But the Bank itself has been clear that any future rate increases are not fully priced into current expectations — a polite way of saying they’re uncertain and far off.
Kiwibank itself takes a slightly more conservative view: it expects the first possible rate hike, if any, to occur in 2027. That lines up with the Bank’s messaging that the economy still has a long way to travel before it needs tightening to curb inflation again.
In short, interest rates are not expected to climb further in the near term — but nor are they expected to be slashed dramatically.
Risks Remain — Both Sides of the Ledger
One of the most striking lines in the bank’s analysis is the Reserve Bank’s view that risks are balanced — not tilted toward recession, but equally not tilted toward runaway growth. That’s a delicate and uncomfortable holding pattern.
On one hand, the recovery could falter. If households stay cautious, if business investment remains weak, if geopolitical pressures or global slowdown bite harder, New Zealand could slide into a period of stagnation.
On the other hand, inflation pockets could prove stubborn. Prices for services, rents, or regulated utilities like power and transport could stay higher for longer, complicating the Bank’s policy choices.
Add in global uncertainty — weak demand in major trading partners, volatile commodity markets, and international financial turbulence — and the road ahead doesn’t look like a smooth glide path, but a slow climb with patches of resistance.
What This Means for Everyday Kiwis
For ordinary New Zealanders — workers, savers, borrowers, and families — the takeaway isn’t dramatic. It’s not a crash, nor is it a euphoric boom.
Instead, it is:
- Inflation has eased, meaning everyday prices should rise more slowly, easing pressure on budgets.
- Interest rates are unlikely to spike again soon, building some breathing room for mortgages and loans.
- But growth will remain modest, meaning job gains may be weak, wage growth muted, and confidence fragile.
- Recovery is ongoing, not complete, and could take years to fully embed.
The economy, in short, isn’t sick — but it isn’t yet vigorous either.
Is the Worst Over? Yes — But Not by Much
New Zealand has largely survived the acute phase of its recent economic turmoil. The dramatic inflation bursts, the fear of runaway prices, and the urgency of policy responses have eased.
But the deeper task of restoring full confidence, strong growth, resilient employment, and vibrant household finances remains ongoing. The worst episodic shocks may be past, but the grind of recovery — and the possibility of renewed challenges — is very much still with us.
The next few years won’t be defined by crisis. They will be defined by slow, steady progress — and careful watching of the indicators that matter.