Are rising home loan rates a case of the Reserve Bank dropping the ball? Kiwibank economists seem to think so, and it's causing a stir. They're pointing fingers at the Reserve Bank, claiming its communication has led to interest rates climbing higher than they should be. But, they remain optimistic about the economy's recovery next year.
Kiwibank's 2026 outlook paints a picture where the Reserve Bank is, in their view, at the heart of some confusion. Even though the bank reduced the official cash rate, wholesale rates have increased since the last announcement.
This has led to higher swap rates, prompting banks like Westpac and the Co-Operative Bank to raise their fixed-term home loan rates.
Sabrina Delgado, a Kiwibank economist, suggests the Reserve Bank could easily fix this when it makes its next announcement. She's not mincing words, calling the situation "annoying and premature." She believes the Reserve Bank's actions have caused financial conditions to tighten, which is frustrating because it stems from what she sees as another misstep.
But here's where it gets controversial... Delgado highlights that while the Reserve Bank cut rates to lower retail rates, a higher-than-expected OCR track has pushed wholesale rates up. Traders are now anticipating rate hikes in early 2026, a move Delgado views as overly aggressive and premature.
Kiwibank's economists suggest this isn't the first time the Reserve Bank has been inconsistent. They note a pattern of shifting stances, from hawkish to dovish and back again, which seems to follow a seasonal trend. This miscommunication, coupled with rising wholesale and retail rates, might lead to another dovish commentary in the coming months.
Delgado believes that retail rates are at a lower bound, but not as low as they should be. She suggests the Reserve Bank could and should lower wholesale rates. Despite these concerns, Delgado maintains her positive outlook for next year, stating that rate hikes are a 2027 story and that the markets were given a poor signal.
She anticipates that unemployment has likely peaked and that employment growth will rebound from the middle of next year. The housing market is also expected to improve, with sales up 6 percent compared to last year. Kiwibank forecasts house prices to rise by around 2-3 percent next year.
The economy is predicted to grow by about 2.4 percent next year and approximately 3 percent the following year. This year's recovery stalled mid-year, primarily due to the impact of US President Donald Trump's tariffs and the Reserve Bank's decision to keep interest rates higher than necessary for growth.
And this is the part most people miss... The Reserve Bank only lowered the cash rate into stimulatory territory in October. For much of the year, policy remained restrictive. Kiwibank believes that current policy settings should encourage activity, with a cash rate of 2.25 percent supporting a solid recovery in 2026. Interest rates are significantly lower than last year and are expected to stay low for a while.
Delgado is excited about a broad-based recovery, citing the right interest rate levels, consumption increases, improved business confidence, a stabilizing job market, and rising housing activity. She notes improvements in discretionary spending and increasing business activity and confidence.
She expects the economy to normalize to a pre-Covid form, rather than the period before the downturn, which was characterized by significant fiscal and monetary policy stimulus.
What do you think? Do you agree with Kiwibank's assessment of the Reserve Bank's actions? Share your thoughts in the comments below!
