New Zealand households and businesses may be facing a tougher road than many had hoped for in 2026, according to Kiwibank economists Jarrod Kerr and Alexandra Turcu.
By elocal Business Desk
In the latest episode of Markets, Mystics & Mayhem, the pair painted a picture of an economy squeezed by rising global uncertainty, a Reserve Bank preparing to tighten monetary policy, a cautious government budget, and continuing pressure from elevated oil prices.
Their overall assessment was blunt.
The recovery many businesses expected this year may be delayed once again.
Reserve Bank Signals Possible Rate Hikes
The biggest surprise for Kiwibank was the Reserve Bank's increasingly hawkish stance.
According to Kerr, the Reserve Bank's Monetary Policy Committee was split 3-3 at its most recent meeting, with external members reportedly favouring rate increases while internal members voted to keep the Official Cash Rate unchanged.
Governor Anna Breman ultimately used her casting vote to maintain the current setting.
For Kiwibank, however, the direction of travel appears clear.
"We've changed our view to expecting them to hike in July. That's no fun. We don't like that. But we're here to say what we think they will do."
Kerr said Kiwibank believes the Reserve Bank is placing significant weight on inflation risks associated with the ongoing Middle East conflict and elevated oil prices.
The economists argued that policymakers appear increasingly concerned that higher energy costs could become embedded throughout the economy if businesses begin passing those costs on to consumers.
Businesses Push Back Against Tightening
While the Reserve Bank may be focused on inflation, Kiwibank says many businesses see the situation differently.
Kerr described extensive feedback received from clients following the Reserve Bank announcement.
"It did not go down well at all with our clients."
Business owners, he said, remain frustrated that additional interest rate pressure is being considered when many sectors are still struggling to recover from what Kiwibank describes as several years of weak economic conditions.
According to the economists, many firms had entered 2026 expecting a cyclical recovery to finally emerge.
Instead, higher oil prices and geopolitical uncertainty have complicated that outlook.
"2026 was supposed to be a good year. Two to three years of misery and pretty severe recession. We were supposed to be in this sort of cyclical recovery."
Oil Prices Remain A Major Risk
The conflict involving Iran continues to dominate economic discussions globally.
Although oil prices remain below the highs seen earlier in the conflict, both economists noted they remain significantly above pre-war levels.
Brent crude was trading around US$95 per barrel during the discussion, still well above levels many households would regard as normal.
Turcu noted that New Zealand petrol prices remain elevated despite occasional discounting at individual service stations.
"We're still quite a bit above what most households would consider normal."
Kiwibank believes the trajectory of oil prices remains one of the most important variables for both inflation and interest rate decisions over the coming months.
The economists suggested a resolution of tensions in the Middle East remains one of the few factors that could materially alter the Reserve Bank's current thinking before its next meeting.
Demand Destruction Versus Inflation
One of the most interesting aspects of the discussion centred on competing economic scenarios.
Kerr argued that the Reserve Bank appears heavily focused on upside inflation risks, presenting multiple scenarios where inflation remains elevated and further rate hikes become necessary.
Kiwibank, however, places greater weight on what economists call "demand destruction."
The argument is simple.
Households facing higher petrol costs, food prices and mortgage payments eventually reach a point where discretionary spending disappears.
"Households can't really afford to spend any more than they currently do."
Turcu argued that many families are effectively reallocating spending toward necessities while reducing consumption elsewhere.
This process, she suggested, naturally suppresses economic activity and inflation over time.
Budget 2026 Delivers Few Surprises
The economists were similarly cautious in their assessment of Budget 2026.
Turcu described the government's latest fiscal package as:
"Very bland. Very, very bland."
Rather than delivering an election-year spending package, the government instead focused on spending restraint, departmental savings and debt reduction.
"No lolly scrambles."
The economists noted that the government is attempting to reduce debt levels while simultaneously forecasting a return to budget surplus by 2029.
While Treasury's forecasts remain more optimistic than Kiwibank's own outlook, the economists acknowledged the government faces a difficult balancing act.
With economic growth subdued and tax revenues under pressure, policymakers have limited room to stimulate activity without increasing borrowing.
Debt Reduction Versus Economic Stimulus
One of the recurring themes throughout the discussion was the tension between fiscal restraint and economic growth.
Kiwibank noted that the government appears determined to reduce debt and improve the country's fiscal position, partly in response to recent warnings from international credit rating agencies.
However, the economists questioned whether a weak economy is the ideal environment for further austerity measures.
"You've got an economy which is still struggling to recover and a government that's doing their best to rein things in at a time when you kind of need a little bit of stimulus."
The result, according to Kiwibank, may be slower growth for longer.
Trades Training Receives A Boost
One area of the budget that received positive commentary was increased support for vocational and trades training.
Savings generated from cancelling the fees-free tertiary education policy have been partially redirected toward training initiatives for young New Zealanders.
Turcu argued that programmes supporting school leavers and trades pathways often generate stronger employment outcomes than broad tertiary subsidies.
The announcement was particularly well received by construction sector groups and industry organisations attending business conferences around the country.
Election Uncertainty Adds Another Layer
Beyond interest rates and the budget, Kiwibank highlighted another factor weighing on confidence.
The November election.
According to Kerr, many businesses remain nervous about the possibility of policy changes following the election, particularly around taxation, property investment and regulation.
"Businesses and households are hyper-sensitive at the moment just because of how weak the economy is."
The economists argued that uncertainty often causes firms to postpone hiring, investment and expansion plans.
In that sense, political uncertainty itself can become a drag on economic growth.
Weather Risks Continue To Mount
The discussion concluded with concerns about increasingly frequent severe weather events across New Zealand.
Both economists noted that recurring storms, flooding and slips continue to create additional challenges for businesses, households and the agricultural sector.
Turcu described the situation as another layer of uncertainty at a time when the economy is already under pressure.
Kerr pointed out that New Zealand's reliance on agriculture leaves the country particularly exposed to weather disruptions.
Unlike mining-based economies such as Australia, New Zealand's economic performance remains heavily influenced by seasonal and climatic conditions.
The Bigger Picture
Perhaps the most striking takeaway from Kiwibank's latest discussion is the sheer number of uncertainties currently facing New Zealand.
Oil prices remain elevated.
The Middle East conflict continues.
The Reserve Bank appears increasingly willing to raise interest rates.
The government is focused on spending restraint.
An election is approaching.
And severe weather events remain a constant risk.
The economists repeatedly returned to one theme.
Uncertainty.
As Turcu noted, uncertainty is no longer simply the issue of the day.
For many businesses and households, it may be the defining economic theme of 2026.
Source: Kiwibank "Markets, Mystics & Mayhem" podcast transcript.