Current Economic Decline driven by Constrained Liquidity

WELLINGTON, New Zealand - Rezul -- The economy is showing signs of strain, and a growing body of evidence points to liquidity shortages and over manipulated interest rates as key culprits.

While global macroeconomic policies and domestic shifts play some part, the Reserve Bank's aggressive interest rate strategy has arguably overcorrected, leaving the economy with limited liquidity.

It is important to reiterate that the Reserve Bank of New Zealand (RBNZ) raised the Official Cash Rate (OCR) from a pandemic low of 0.25% to a peak of 5.5%.

The high rate was intended to tame inflation, even though we noted in earlier Trend Analysis research that the inflationary rates being evaluated were based on an over reliance of CPI (consumer price index) as a core indicator.

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Prior to the GFC, CPI effectively identifying real inflation.  However, post COVID the environment changed and markets proactively began to hide inflationary indicators.

Prices had increased, but goods delivered, the type and level of services, and manufactured products supplied to consumers saw substantive reductions in volume, scope, size, and quality.

While inflation has since cooled in some areas, the rapid tightening has had unintended consequences.

Liquidity in financial markets has significantly declined, with investors and banks showing reduced appetite for risk and tightly managed credit extension.

Research indicates that there is a definitive lack of liquidity in the New Zealand economy.  This liquidity crunch is not just a theoretical concern as it is playing out in the housing market.

Despite a significant drop in home prices since the pandemic peak, affordability remains elusive. In lower-cost regions, even new homes (priced below national averages) require mortgage repayments that exceed reasonable thresholds for most households.

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Even with large deposits, the 30-year mortgage repayments remain burdensome, especially as interest rates hover well above pre-pandemic norms.  Such mortgage repayments based on current interest rates do not make financial sense to most potential buyers.

Therefore, housing inventory is rising at an unsustainable rate.  There are over 36,000 properties for sale nationwide. Yet buyers remain hesitant because of prohibitive borrowing costs.

This disconnect between price correction and repayment feasibility underscores the deeper issue: monetary policy has throttled liquidity to the point of stagnation.

New Zealand's economic decline appears to be a result of not merely a cyclical but a structural decline. The over-manipulation of interest rates has drained liquidity, stifled investment, and distorted housing affordability.

Until monetary policy recalibrates to support sustainable growth, the economy will remain in a downward loop of suppressed demand and constrained opportunity.

Trend Analysis Network is a think tank based in New Zealand.