OECD Urges Tight Monetary Policy and Spending Control in New Zealand

OECD on Monetary Policy: In a recent report, the Organisation for Economic Co-operation and Development (OECD) highlighted the necessity for New Zealand to maintain a restrictive monetary policy until inflation aligns with the central bank's target range. The OECD also advocated for government spending moderation to address economic challenges.

The Reserve Bank of New Zealand (RBNZ) has kept its cash rate steady at 5.5 per cent for six consecutive meetings, citing the need for restrictive monetary policy to alleviate capacity pressure and rein in inflation. However, despite the rate hikes initiated since October 2021, inflation remains persistent, fueled by heightened domestic demand driven partly by high migration rates.

While economic growth is forecasted to be sluggish in 2024 before rebounding in 2025, the OECD warns of significant risks originating from global factors. Additionally, the OECD report highlighted concerns over New Zealand's fiscal position, attributing it to pandemic-related spending overruns and a subsequent increase in the government spending-to-GDP ratio.

Responding to the report, Finance Minister Nicola Willis emphasized the urgency of reining in government spending to rebuild the economy following a period of elevated inflation and interest rates. Acknowledging the OECD's recommendations, Willis affirmed New Zealand's commitment to addressing economic challenges and stated that the government would consider further action.

New Zealand, currently experiencing a technical recession after a slight economic contraction in the fourth quarter, has witnessed political discourse surrounding economic policies. The centre-right National Party, which took office last October, has criticized the previous Labour Party's policies for the recession.

With Reuters Inputs