As for interest rates, the IMF warned there was a risk the Reserve Bank of New Zealand (RBNZ) would need to raise the official cash rate (OCR) even more.
The RBNZ plans to leave the OCR at 5.5 per cent for some time and wait for its effects to flow through the economy, as more borrowers roll their loans over on to higher interest rates.
The IMF saw monetary conditions remaining tight for a “prolonged period” but noted persistently high inflation and wage growth could compel the RBNZ to lift the OCR even more, or keep it higher for longer, “especially if fiscal policy does not consolidate as planned”.
The Treasury deemed Budget 2023 to be expansionary in the year to June 2024, and then contractionary over the following three years.
The IMF said that if the Government didn’t tighten its purse strings as planned, and the RBNZ had to keep raising the OCR, the impact on growth, household consumption and house prices could be “significant”.
“A severe version of this scenario could also have financial stability implications, given banks’ significant exposure to housing, high household debt, and borrowers’ vulnerability to rising interest rates,” the IMF said.
On the flipside, it said rising net migration could ease labour constraints, which could lower inflation and bring interest rates down more quickly than expected.
The IMF recognised that being a small trading nation, New Zealand is affected by what happens overseas. Nonetheless, it stressed the Government’s policy mix “must strike a restrictive bias to balance the economy”.
It said discretionary spending that adds to inflation should be limited, and the Government should better target spending towards supporting vulnerable households, including by using more means testing.
The IMF said it should stick to its plan to remove the temporary fuel tax cut on June 30 and rely on “automatic stabilisers” (ie the welfare system) to address the impact of slower economic growth (ie job losses).
It supported investment in infrastructure, as well as spending in response to Cyclone Gabrielle and flooding in the North Island earlier this year.
It cautioned that the “cyclical” downturn in house prices doesn’t mean the shortage has been plugged.
The IMF said policy reforms to keep increasing the supply of housing should continue.
“Achieving long-term affordability depends critically on freeing up land supply, improving planning and zoning, and fostering infrastructure investment to enable fast-track housing developments and reduce construction costs and delays.”
The IMF characterised the Reserve Bank’s decision to ease loan-to-value ratio (LVR) restrictions to make it easier for homebuyers with smaller deposits to get mortgages as “countercyclical”.
It didn’t expect the loosening of these rules to add to demand, exacerbating inflation. In fact, the IMF said financial stress caused by high interest rates should be addressed through financial stability tools like LVR rules.
On the climate front, the IMF said continued efforts were needed to meet greenhouse gas emission goals.
It was concerned about the carbon price plummeting on the back of the Government not changing Emissions Trading Scheme settings to let the price rise as widely expected.
It said this could weaken the signal to the private sector to reduce emissions. A lower price also reduces the cash proceeds the Government receives to spend on climate-related initiatives.
The IMF said the Government’s Emissions Reduction and National Adaptation Plans were useful at a high level but needed more detail “to enable the prioritisation of policies, including reforms to reduce agricultural emissions”.
Jenée Tibshraeny is the Herald’s Wellington Business Editor, based in the parliamentary press gallery. She specialises in government and Reserve Bank policymaking, economics and banking.
