30 Nov 2023

NZ interest rates need to stay high, tax cuts may drive inflation - OECD

2:54 pm on 30 November 2023
Adrian Orr with ascending graph and money

The Reserve Bank, led by Adrian Orr, will need to maintain tight monetary policy throughout 2024, according to the OECD. Photo: RNZ

The New Zealand economy will post only modest growth for the next couple of years, interest rates need to stay high for an extended period, and tax cuts may cause issues, according to the Organisation for Economic Co-operation and Development (OECD).

The group's latest economic outlook largely mirrors the Reserve Bank's view of the economy and interest rates contained in the latest monetary policy statement.

The OECD has forecast growth to slow to 1.3 percent next year before ticking up to 1.9 percent in 2025, with a mixed bag of influences.

"Higher interest rates are weighing on consumption and housing investment, while lower global growth is restraining inbound tourism and reducing the price of commodity exports," the report said.

It said the surge in migration this year had been filling labour shortages and supporting broad growth, but was also putting pressure on demand for houses and other services, which would in turn pressure inflation.

But the OECD said the state of the economy and inflation meant the Reserve Bank needed to keep policy "restrictive".

"The Reserve Bank will need to maintain tight monetary policy throughout 2024, especially as core inflation is still sticky, fiscal consolidation is very gradual, and high population growth due to net inward migration will likely re-ignite pressures in the housing market, slowing the decline in inflation."

But the OECD also sounded a note of caution on tax cuts.

It said financial and structural policies were needed that would help counter inflation and even out imbalances "rather than adding to demand via tax cuts or other non-targeted subsidies".

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