Home Economy News RBNZ must keep policy restrictive until inflation falls within target, OECD says

RBNZ must keep policy restrictive until inflation falls within target, OECD says


SYDNEY (Reuters) – The Organisation for Economic Co-operation and Development (OECD) said on Monday that New Zealand’s monetary policy must remain restrictive until inflation is brought within the central bank’s target range, and urged the government to curb spending.

“Monetary policy needs to remain data dependent: when inflation will reach the central bank’s target range is uncertain and there is a risk of further negative global shocks,” the OECD report said.

The Reserve Bank of New Zealand (RBNZ) last month kept its cash rate unchanged at 5.5% for the sixth consecutive meeting and reiterated that restrictive monetary policy was necessary to further reduce capacity pressure and bring down inflation. It has a monetary policy goal of keeping inflation within 1% to 3%.

Though rate hikes since October 2021 had led to a marked increase in financing costs and slowed the economy, inflation was likely to be persistent as high migration had pushed domestic demand higher than RBNZ’s expectations, OECD said.

“Growth is projected to be slow in 2024, before picking up in 2025, but risks originating offshore are high,” it said.

“The pandemic and spending overruns led to a permanent increase in the government spending to GDP ratio, resulting in a substantial deterioration of New Zealand’s fiscal position.”

The OECD conducts country surveys every two years to review the economic policies of its members.

The New Zealand government said the report reinforced the importance of bringing government spending under control.

“This report reinforces the urgent need to rebuild the New Zealand economy after a period of elevated spending, inflation and interest rates,” Finance Minister Nicola Willis said in a statement.

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New Zealand is in a technical recession after its economy shrank slightly in the fourth quarter. The centre-right National party, which returned to power last October, had blamed the previous Labour Party’s policies for the recession.

New Zealand is already acting on several initiatives proposed by the OECD, Willis said, adding her government would consider the other recommendations.

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