Reserve Bank

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

The Organisation for Economic Co-operation and Development (OECD) anticipates a period of modest growth in the New Zealand economy over the next few years. The forecast aligns closely with the Reserve Bank’s perspective on economic conditions and interest rates as outlined in the most recent monetary policy statement.

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According to the OECD’s economic outlook, the projected growth is expected to decelerate to 1.3 percent next year before experiencing a modest increase to 1.9 percent in 2025. Various factors contribute to this scenario, with higher interest rates affecting consumption and housing investment. Additionally, global economic slowdown is dampening inbound tourism and decreasing the value of commodity exports.

The report acknowledges that the substantial increase in migration this year has alleviated labor shortages and fostered general economic growth. However, it also highlights the associated challenges, such as heightened demand for housing and services, leading to potential inflationary pressures.

Despite these considerations, the OECD suggests that the Reserve Bank should maintain a “restrictive” monetary policy due to the prevailing economic conditions and inflationary concerns. The report emphasizes the need for the Reserve Bank to uphold tight monetary policy throughout 2024, especially given persistent core inflation, gradual fiscal consolidation, and the likelihood of increased housing market pressures due to continued high population growth from net inward migration.

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The OECD, while recognizing the positive impact of migration on the economy, issues a cautionary note regarding tax cuts. It advises that implementing financial and structural policies is crucial to counter inflation and address imbalances, emphasizing the importance of targeted measures over non-specific interventions like tax cuts or subsidies that may inadvertently contribute to increased demand.