A sharp deterioration in New Zealand consumer confidence is adding to the pressure on the Reserve Bank of New Zealand as it weighs further interest rate hikes against a labor market already hovering near a decade-high unemployment. The backdrop of weak sentiment reduces the likelihood that domestic demand and inflation will remain high without further policy tightening, but it also increases the political and economic cost of raising interest rates further. The New Zealand dollar could face headwinds if data flows continue to point to stagflationary pressure, while price markets will be watching closely for any sign that the Reserve Bank of New Zealand is resetting its expected tightening path.
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A Westpac McDermott Miller survey showed New Zealand consumer confidence fell to 80.4 in the second quarter from 94.7, its lowest level since 2023, as fuel costs caused by the war in the Middle East and borrowing pressures hit households. (205 characters)
summary:
Source: Westpac McDermott Miller Consumer Confidence Survey
- The index fell to 80.4 in the second quarter from 94.7 in the previous quarter, its weakest reading since 2023.
- A reading of less than 100 indicates that the number of pessimists outnumbers the number of optimists
- Westpac attributed this decline to higher fuel and living costs resulting from the conflict in the Middle East, in addition to upward pressure on borrowing costs.
- The Reserve Bank of New Zealand announced at least two quarter-point rate hikes by the end of the year despite unemployment reaching a decade high of 5.3%.
- The government has removed the Reserve Bank of New Zealand’s commitment to full employment from its mandate in 2023, leaving inflation as the main policy target.
- The Reserve Bank of New Zealand expects unemployment to remain at 5.4% for at least a year, a level not seen before late last year since 2015.
New Zealand consumer confidence fell to its lowest level since 2023 in the second quarter, a closely watched survey showed on Wednesday, as the economic fallout from the conflict in the Middle East seeped into household budgets through rising fuel prices, rising costs of living and growing anxiety about the borrowing outlook.
The Westpac McDermott Miller Consumer Confidence Index fell to 80.4 from 94.7 in the previous quarter, a sharp decline that pushed the reading below the 100-point threshold that separates optimists from pessimists. Westpac said the conflict had led to a widespread deterioration in sentiment, with cost pressures and concerns about the path of economic activity exacerbating pressure on households already stressed by years of high interest rates.
The result comes at an uncomfortable moment for the Reserve Bank of New Zealand, which is preparing to raise interest rates further despite a marked decline in the labor market. The central bank skipped a rate hike at its last meeting in the closest decision in its history, but expected an increase of at least a quarter of a percentage point before the end of the year. At the same time, it expected unemployment to remain at 5.4% for at least a year, a level that had not been recorded before late last year since 2015.
The policy calculus is shaped by a change in mandate enacted by the National Party-led coalition government shortly after taking office in 2023, which stripped the Reserve Bank of New Zealand of its formal commitment to supporting full employment. Inflation remains the only priority, with the central bank forecasting that the energy shock caused by the Iranian conflict will push interest rates to 4.3% in the coming months, well above the target range of 1% to 3%.
Critics warn that the combination of a weak labor market, a cost-of-living crisis, and rising interest rates could push the economy into a long cycle of stagflation. With the labor market already the poorest among advanced economies by some measures, confidence data of this kind will intensify scrutiny of whether the RBNZ’s narrow mandate is proportionate to the circumstances it now faces.
