Wellbeing Budget 2023

Support for today
Building for tomorrow

Monetary policy has responded to inflationary pressures with higher interest rates, which have a significant influence on the outlook…

Globally, central banks raised interest rates over 2022 to reduce demand and inflationary pressures. The Reserve Bank of New Zealand increased the official cash rate from 0.25 percent in October 2021 to 5.25 percent in April 2023. Higher interest rates have contributed to house prices falling by nearly 17 percent from their peak, with further declines expected to amount to a total decline in the quarterly house price index of 21 percent, between the December 2021 and June 2024 quarters.

High interest rates are expected to contribute to modest economic growth over 2023, with consumer spending volumes impacted by high consumer prices, falling house prices and rising mortgage costs.

…contributing to rising unemployment but declining inflation

The Treasury forecasts unemployment will rise to 5.3 percent by the end of 2024, a lower peak than the 5.5 percent forecast at the Half Year Update. Weaker demand is expected to drive inflation below 4 percent by the start of 2024, and towards 2 percent by the end of the forecast period.

Figure 5 – Inflation and wage growth

Sources: Stats NZ, the Treasury

As inflation eases, interest rates are predicted to fall from early 2024, to around 3 percent by the end of the forecast period. This supports a pickup in economic growth which averages 3 percent in the final two years of the forecast.

Households have been under pressure as prices increased faster than wages. Inflation outstripped wage growth in the year to June 2022, but wages and prices grew at a similar pace in the year to December 2022. The Treasury forecasts that real wages will grow strongly throughout the forecast period (Figure 5), which will provide some relief to households.

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