Wellington — New Zealand entered October 2026 with an economy that is technically expanding but operationally strained. The narrative that has defined the year—a gradual, uneven recovery from the sharp disinflationary squeeze of 2024–25—survived the month largely intact, but barely. Growth is positive yet thin, inflation is falling yet still outside the Reserve Bank’s target band, the labour market is stabilising at a painful elevation, and the central bank has chosen to hold its fire even as it warns that further tightening is “highly likely.” The result is a policy environment defined less by decisive action than by conditional waiting, and an economy whose improvement remains concentrated in export-facing pockets rather than in household budgets.
The month’s most consequential event came on 28 October, when the Monetary Policy Committee voted 4–3 to keep the Official Cash Rate at 2.75 per cent, defying market expectations of a hike and delivering what several commentators described as a surprise hold. The split vote—with three members favouring an immediate increase to 3.00 per cent—exposed genuine disagreement within the committee about the urgency of the inflation fight. Governor Anna Breman wasted little time in qualifying the decision, stating that further OCR increases were “highly likely at coming meetings,” pointing to anchored inflation expectations, subdued wage growth and weak domestic demand as factors that afforded the committee room to wait. The hold should therefore be read not as a pivot but as a pause, and a narrow one at that. Major bank economists almost universally expect a 25-basis-point increase in December, with ASB and BNZ projecting the OCR at 3.25 per cent by year-end and Westpac outlining a path toward 4 per cent by 2027.
The case for restraint rests on a growth profile that remains conspicuously soft. Second-quarter GDP expanded just 0.2 per cent quarter-on-quarter, a sharp deceleration from the upwardly revised 0.9 per cent recorded in the first quarter and the weakest quarterly expansion since mid-2025. The composition of that growth offers little comfort. Goods-producing industries rose 1.3 per cent, supported by construction and manufacturing, but primary industries contracted 0.3 per cent, private consumption stalled outright, and government spending fell 1.7 per cent. Exports provided the one unambiguous positive, rising 3.3 per cent, but the domestic demand engine that underpins sustained recoveries remains effectively idle. On an annual basis, GDP was up 2.6 per cent, exceeding expectations of 2.3 per cent, but that headline figure flatters a quarterly momentum that has visibly waned.
Inflation, meanwhile, has cooled at the margin without yet reaching a comfortable destination. The consumers price index rose 3.7 per cent in the year to September, down from 4.1 per cent in June and slightly below market and Reserve Bank projections. The quarterly increase of 0.7 per cent was driven largely by a smaller contribution from fuel prices, and officials noted that inflation would have been 3.2 per cent had petrol prices been unchanged. That detail is important, because it suggests that the disinflation visible in the headline number is in part a function of a temporary stabilisation in energy costs rather than a durable easing of domestic price pressure. Core inflation measures have risen to around the top of the Committee’s 1–3 per cent target band, and price increases have become more broad-based across the economy. Non-tradables inflation—the domestically generated component that the RBNZ watches most closely—was 3.3 per cent, weaker than expected but still elevated. The Reserve Bank’s own projection anticipates annual inflation rising to 4.4 per cent in the December quarter, largely reflecting current futures prices for fuel, a forecast that underscores how quickly the headline improvement could reverse.
The labour market presents a similarly uncomfortable picture: stabilisation at a level that offers little relief to households. The unemployment rate held at 5.6 per cent, an eleven-year high, with approximately 171,000 people out of work. Wage growth has effectively flatlined. Median hourly earnings stood at $36.06 in September, unchanged both month-on-month and across the quarter, while annual wage growth crept up to just 1.1 per cent—a collapse from the 4–5 per cent range recorded in mid-2025. The SME sector did record a sharp rebound in headcount, rising 2.0 per cent in September from August, but hiring momentum has not translated into pricing power for workers. Westpac economists expect the current 5.6 per cent unemployment rate to mark the peak of this cycle, but the descent from that peak is projected to be gradual at best. Subdued wage growth is, paradoxically, one of the factors the RBNZ cites as justification for patience on rates: without a wage-price spiral, the risk of inflation becoming entrenched is lower, even as headline CPI remains above target.
The fiscal backdrop has improved more visibly than the real economy. The Pre-election Economic and Fiscal Update, released in late September but framing October’s fiscal conversation, showed the operating balance before gains and losses (OBEGALx) deficit tracking at $6.8 billion for the 2026/27 year, down from the $11.4 billion forecast at Budget 2026, with a narrowing to $0.8 billion projected for 2027/28. The structural fiscal deficit has fallen to around 1 per cent of GDP, down from 2.5 per cent in 2023/24, and the bond programme has been reduced by $4 billion in the current year and $15 billion across the forecast period. Treasury attributed the improvement to stronger tax outturns and higher nominal GDP growth, the latter driven in part by more persistent inflation rather than by real economic momentum. The Treasury Secretary was explicit that the balance of risks remains skewed toward weaker growth and a weaker fiscal position than projected, a caution that tempers any reading of the improved books as a durable consolidation.
The external accounts tell a story of strong export performance offset by a heavy import bill. The merchandise trade deficit widened to $1.97 billion in September, up from $1.41 billion a year earlier and far exceeding estimates of a $0.78 billion gap. Exports rose 12.3 per cent year-on-year to $6.47 billion, led by dairy, meat and aluminium, with shipments to China up 13.8 per cent and to the European Union up 9.2 per cent. But imports surged 17.7 per cent to $8.44 billion, driven overwhelmingly by petroleum and petroleum products, which rose 95.8 per cent, alongside electrical and mechanical machinery. The deficit is therefore less a symptom of weak export demand than of the cost of imported energy, a dynamic that links directly to the inflation outlook and to the RBNZ’s reluctance to declare victory.
The dairy sector has provided one of the few unambiguous bright spots. Global Dairy Trade auction prices rose 1.2 per cent in early October to an average of US$3,928, with skim milk powder reaching its highest average price on the platform since July 2022. By late October, Fonterra had raised the midpoint of its 2026/27 farmgate milk price forecast to $9.75 per kilogram of milksolids, narrowing the range to $9.00–$10.50, and BNZ lifted its own forecast to $10.00/kgMS. The strength is concentrated in powders rather than milk fats—butter prices fell to their lowest level since September 2023—but the overall signal is of resilient global demand for New Zealand’s core export commodity, a factor that supports the export-led recovery the RBNZ has identified.
The housing market remains balanced to the point of inertia. The national median sale price eased 2.3 per cent year-on-year to $755,000 in September, sales fell 11.6 per cent, and the REINZ House Price Index declined 1.5 per cent annually. Supply remains the binding constraint on price growth, with unsold stock more than four times the number of monthly sales, and the spring selling season has brought the expected increase in listings without a corresponding lift in prices. Regional divergence persists: Canterbury, Otago and Southland continue to outperform, supported by rural and tourism activity, while Auckland’s House Price Index fell 3.2 per cent annually against just 0.6 per cent outside Auckland. The market has become less sensitive to oil-price shocks than earlier in the year, but the Reserve Bank’s observation of “early signs of a recovery in residential investment” has yet to translate into broad-based house-price momentum.
Business sentiment offered a counterpoint to the soft hard data. The ANZ Business Outlook Index rose to 52.5 in October from 51.9 in September, with export intentions strengthening and profit expectations edging higher. But expected own activity eased, investment intentions weakened, and pricing intentions climbed to 52.2 from 48.4, a combination that suggests firms are more optimistic about the external environment than about their own domestic prospects. Inflation expectations among businesses moved slightly higher to 3.31 per cent, a reminder that the psychological dimension of the inflation problem has not been fully extinguished.
The political context adds a layer of uncertainty that the economic data alone cannot capture. Early voting for the 7 November general election began on 26 October, and the campaign has featured competing fiscal plans with divergent implications for the deficit trajectory and the tax burden. Housing has remained largely outside the main political debate, and the market has shown limited sensitivity to policy announcements, but the post-election fiscal mix remains genuinely unknowable and therefore a source of risk to the Treasury’s already cautious forecasts.
Taken together, October’s data describe an economy in a holding pattern: growing, but slowly; disinflating, but not yet durably; employing more people, but not paying them more; exporting strongly, but importing expensively. The Reserve Bank’s 4–3 hold captures the tension precisely. The case for patience rests on subdued wages and weak domestic demand; the case for action rests on core inflation at the top of the band, a currency that has fallen around 3 per cent since early September, and fuel prices that threaten to push headline CPI back above 4 per cent by December. The Committee has chosen to wait, but its own language makes clear that the wait is conditional and likely short. For households and businesses, the practical implication is that borrowing costs are unlikely to fall in the near term and may rise once more before the year is out. For the economy as a whole, the risk is not recession but stagnation at a level of activity too weak to repair the labour market and too inflationary to permit relief. That is a difficult equilibrium to sustain, and October did little to suggest it will resolve itself quickly.