New Zealand’s Budget predicts a 2024/25 operating balance deficit before gains and losses at NZ$-14.74 billion, while the 2025/26 deficit is projected at NZ$-15.60 billion. The net debt is expected to be 42.7% of GDP in 2024/25, and the cash balance for the same period is projected at NZ$-9.99 billion.

The GDP for 2024/25 is estimated to shrink by 0.8%, with recovery expected in 2025/26 and 2026/27 at growth rates of 2.9% and 3.0% respectively. Inflation is predicted to remain within the 1% to 3% target band over the next five years.

Currency Reaction

The New Zealand Dollar has shown little reaction to the budget announcement, trading 0.25% lower near 0.5925. The government does not foresee an operating balance surplus over the next five fiscal years, and trade tariffs remain a factor in the economic recovery pace.

While the headline figures may appear daunting at first glance—with a deeper deficit in 2025/26 than the previous year and net debt settling just under 43% of GDP—they offer a framework that underscores the government’s decision to continue leaning on fiscal support rather than retrenchment. The projected contraction of 0.8% in GDP for the upcoming year coincides with this wider borrowing, signalling a preference for stimulus rather than cuts in the face of softening output.

That said, core inflation remains remarkably well-behaved. A consistent forecast that keeps inflation within the 1% to 3% band over the next half-decade indicates that price stability is not under threat for now. There is space for monetary policy to remain sticky for longer, but without the urgency to tighten further. As bond issuance ramps up, it will feed through to funding costs, but not necessarily create material pressure on the Reserve Bank to respond immediately or aggressively.

Let’s not overlook the currency reaction, or the lack thereof. The Kiwi dipped modestly, but such a limited selloff—just 0.25%—suggests these projections were anticipated to some degree. Markets have become increasingly desensitised to deficit headlines when the broader inflation and growth narrative remains contained. That points to a composed and deliberate read-through for rates and FX volatility.

Trade and Interest Rates

For us, the balance of risks hinges on timing. While the multi-year recovery profile shows decent momentum from 2025 onwards, the present contraction will bring transitory pain across interest rate structures. Expect a flatter curve bias to persist through the next two quarters, particularly if offshore leads remain subdued.

It’s also worth dissecting the forward-looking assumptions. Export tariffs still weigh on projected trade gains. That acts as a drag on the recovery’s glide path, but more importantly, it introduces a variable that’s less responsive to domestic policy. Derivative positioning that factors in a delayed or uneven improvement in trade balances will likely outperform static growth expectations.

Short-end interest rate trades may remain range-bound unless the Reserve Bank adjusts its stance more quickly than expected. However, further out the curve, term spreads could drift wider with any uptick in issuance, especially under softening GDP metrics. We continue to focus on relative rate differentials against global benchmarks, with a particular eye on how these budget assumptions square with monetary policy timelines.

For those tactically trading shifts in volatility, the benign inflation outlook implies limited upside in break-evens and inflation swaps over short to medium horizons. However, given the widening deficits and ongoing borrowing needs, sovereign credit narratives could flare intermittently. Option pricing may remain suppressed, though a repricing higher is not out of the question if debt issuance grows faster than the bond market absorbs.

Robertson’s figures may not have jostled the Kiwi much intraday, but debt dynamics and shifting long-term growth rates continue to carve out opportunity—especially where policy divergence begins to creep in. Long Kiwi positions should be calibrated with care, particularly during any global rate shifts or demand-side shocks. The real test for positioning will come once we begin to see whether the 2025/26 bounce clears early hurdles—or if downside revisions start to erode the 3% growth targets currently pencilled in.

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