In our recent discussion with Kiwibank Chief Economist Jarrod Kerr, we explored whether OCR cuts could finally pull New Zealand out of recession - or if challenges like the Capital Gains Tax proposal will hold the economy back. With businesses under pressure and consumer confidence still fragile, is 2025 the year of recovery or just another false dawn?
OCR Cuts and the Road to Recovery
Jarrod Kerr believes the Reserve Bank’s OCR cuts have only just brought monetary policy back to neutral – not yet into stimulatory territory. While the Official Cash Rate has dropped from 5.5% to 2.5%, many households and businesses are still feeling the strain. As Kerr explains, “You’ve removed the restrictiveness of policy and put it in neutral. You’re not stimulating.”
Despite lower rates, business sentiment remains cautious. Many firms expected 2025 to be a recovery year but are instead facing worsening conditions compared to 2024. Kerr notes that frustration is growing among business owners who are “more likely to lay people off than hire,” a clear sign of continued recessionary pressure.
However, he believes the turning point could come once confidence returns to both consumers and businesses – when discretionary spending picks up, firms begin hiring, and investment replaces saving. OCR cuts may have laid the groundwork, but confidence will determine whether New Zealand moves from recession to recovery.
Housing, Inflation, and the Role of Confidence
The housing market remains central to the OCR discussion. Kerr expects house prices to rise in 2026, which could lift consumer confidence and spending. Yet, inflation still lingers in the background. While headline inflation has crept to 3%, much of it is driven by non-discretionary costs – council rates, food, and insurance. Beyond those, Kerr says, “Inflation is actually heading in the right direction.”
The Reserve Bank’s new Governor, Anna Breman, is expected to maintain a transparent approach to monetary policy. Kerr welcomes her appointment, noting her experience at Sweden’s Riksbank, the world’s oldest central bank. He suggests her leadership could help New Zealand avoid repeating policy mistakes that kept interest rates too high for too long.
For now, Kerr predicts another 25-basis-point cut, taking the OCR to 2.25%, before stabilising. Once rates bottom out, borrowers could look to fix for longer terms, locking in the lows before rates eventually rise again.
Capital Gains Tax: Reform or Fearmongering?
When the conversation turned to Capital Gains Tax, Kerr emphasised the importance of perspective. “It’s not the end of the world,” he explained. Using Australia as an example, he pointed out that their property market remained resilient even after a CGT was introduced in the 1980s.
While Kerr supports fair taxation, he highlighted that the real impact depends on how the tax is structured – particularly which assets are included and what deductions are allowed. Importantly, the proposed CGT would only apply to gains after July 2027, easing fears of retrospective taxation.
Michael and James agreed that taxing profits from investments is reasonable but questioned the exclusion of farms and business sales. Kerr acknowledged the political realities but reiterated that New Zealand needs new revenue streams to address its infrastructure challenges – from water systems to housing and transport.
He cautioned against alarmist reactions, urging Kiwis to focus on facts rather than fear: “This isn’t the end of the property market. It’s about ensuring the system is fair and sustainable.”
Global Headwinds and the AI Market Boom
Beyond New Zealand, global markets and the potential AI bubble were also on Kerr’s radar. While acknowledging “frothy” valuations in the tech sector, he believes the momentum could continue for some time yet – comparing it to the late-1990s dot-com era, which sparked long-term innovation despite short-term volatility.
Kerr remains optimistic that global growth and tourism recovery – particularly from China and Australia – will support New Zealand’s rebound. However, he warns that external shocks often trigger local downturns: “We can be cruising along on our own little world, and then something blows up offshore and really hits us.”
Key Takeaways
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The OCR cut from 5.5% to 2.5% has brought rates to neutral, but not yet stimulatory levels.
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Many businesses still report worsening conditions – consumer confidence will be crucial for recovery.
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Inflation is easing beyond essentials, and the new Reserve Bank Governor may push for smarter policy.
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Capital Gains Tax won’t apply retroactively and is unlikely to crash the housing market.
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Tourism recovery and global growth could fuel New Zealand’s rebound – if external shocks stay at bay.
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