This week's RBNZ Monetary Policy Statement is shaping up as anything but ordinary. The war in Iran has injected a stagflationary shock into an economy that was still fragile, complicating the balance between weaker growth, high unemployment, and sticky inflation.  The direction for interest rates is up - the real question is when to start.

Kevin Warsh’s confirmation as Fed Chair may prove less about near-term rate cuts and more about a broader shift in the Fed’s framework. 

New Zealand’s low potential growth and sticky non-tradable inflation still point to limits on how long policy can remain stimulatory, but the war has complicated the path.

New Zealand’s retirement income debate is too narrow.  We tend to talk about KiwiSaver, New Zealand Superannuation, and the New Zealand Superannuation Fund as separate conversations.  But they’re not.  They’re interdependent parts of a single system, embedded within the Crown’s broader balance sheet.  We need a more joined-up conversation."

The global financial system is safer than it was in 2008 — but the risks haven’t disappeared. They’ve moved.  Private credit has become a central source of corporate financing. As higher interest rates test the model, the next period of financial stress may emerge outside the banking system.

Developed markets now face lower trend growth, more inflation sensitivity, and higher neutral interest rates than in the post-GFC era.

Geopolitical fragmentation is lifting risk premia, implying structurally higher volatility and less valuation support for both equities and bonds than in the post-GFC globalisation era.

Throughout the developed world there is increasing focus on the politically fraught issue of fiscal sustainability.  This week the UK Chancellor will bring down a Budget that attempts the classic fiscal triad of maintaining fiscal credibility, supporting growth and the preservation of political capital.

After surprising to the upside in the March 2025 quarter, NZ GDP growth surprised to the downside in the June quarter, both by an order of magnitude that likely overstated the strength and weakness of the respective periods.

Yield curves across the developed world are steepening, with long-term rates rising relative to the front end. This is not merely cyclical noise: it reflects a structural re-pricing of risk in global capital markets.  New Zealand's fiscal credibility provides resilience but for a small open economy, resilience is not immunity from global forces.

March quarter GDP data was stronger than expected but the growth was narrowly focussed.  More recent activity data has been considerably weaker.

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Donald Trump’s inauguration on January 20th  unleashed dramatic global shifts. So far, the US economy and markets have borne the brunt of disruptions. The international response has been broadly hostile, and investors are reconsidering US holdings

New Zealand Term Deposit Rate cuts are in full swing for 2025. Diversified Income Funds can continue to beat bank deposits.

New Zealand’s upcoming Budget is shaping up as far more than a pre-election fiscal update. 

The onset of the war in Iran has delivered a stagflationary shock to the recovery.  Growth will suffer on the back of higher fuel prices, while headline inflation will move sharply higher in the near-term.

New Zealand’s low potential growth and sticky non-tradable inflation still point to limits on how long policy can remain stimulatory, but the war has complicated the path.

​The Iran war is no longer just a geopolitical risk — direct strikes on energy infrastructure suggest a shift toward persistent supply disruption, not a temporary shock.

Artificial intelligence is widely expected to deliver a surge in productivity, ease inflation, and justify today’s elevated market valuations. But what if the timing is wrong?  

Low potential growth is the core problem as New Zealand hits capacity and inflation constraints quickly, even in fragile recoveries. Policy has been late at turning points and delays have forced aggressive tightening and easing that amplify the cycle.

The Fed is facing a tough call when it meets next week for the final time this year.  Markets have the probability of a 25bp cut at 85%.  The reality is the decision will be a lot closer.  Ultimately the decision will come down to the Fed’s collective judgement on asymmetric risks - protecting the labour market if policy is now too tight, versus protecting price stability if disinflation is incomplete.

When the Reserve Bank of New Zealand front-loaded its 50bp cut in October, it signalled that more easing was likely. Taking that guidance at face value, a further 25bp cut next week looks the path of least resistance, accompanied by a dovish signal that the door remains open to additional easing if required.  However, the hurdle for further easing beyond that is high. Additional cuts become likely only if the tentative signs of recovery falter.

After the disappointment of the June quarter GDP result, the good news is green shoots are starting to emerge as data for the second half of the year starts to come in.  Amongst all the data noise, the job for Government is to become far more focused on improving our perennially moribund productivity performance.

As we head into next week’s Reserve Bank of New Zealand (RBNZ) August Monetary Policy Statement, the key question is how much lower interest rates will need to go to stimulate demand.  At the same time however, it’s worth remembering that low interest rates aren’t a panacea for all that ails us, as they simply mask and potentially delay attention to our deeper economic challenges.

We have been expecting a recovery to emerge in the second half of the year, primarily driven by lower interest rates feeding through into household disposable income.  Recent developments in the global trade environment challenge that assumption.  For now, we have trimmed our GDP forecasts on the basis of lower global growth.  The outlook is highly uncertain.

The uncertainty of US tariff policy is morphing into a hard, cold reality.  Weakness in the “soft” sentiment data will soon become weakness in the “hard” activity data.  On inflation, the Fed needs to be alert to the risk of renewed persistent inflation if consumers loss of purchasing power leads to higher wage demands in a tight labour market.