The International Monetary Fund (IMF) has urged New Zealand to raise its official cash rate and implement a range of fiscal and structural reforms to support economic growth and ensure long-term financial sustainability. In its latest review released this week, the IMF highlighted the challenges facing the economy amid ongoing global uncertainties, including the recent conflict in the Middle East, which has affected disposable incomes and business costs.

The fund revised its economic growth projections downward, forecasting 2% growth for 2026 and 2.7% for 2027, citing the impact of elevated uncertainty on investment and consumption. Inflation is expected to peak at around 4% by mid-2026, primarily driven by high oil prices, before gradually returning to the Reserve Bank of New Zealand’s (RBNZ) 2% target next year. To maintain inflation control, the IMF recommended that the RBNZ increase the official cash rate from its currently stimulative level to a more neutral stance, estimated at about 3%, by the end of the year. The fund emphasized the need for flexibility in monetary policy, advising swift adjustments if inflation pressures become more widespread or persistent.

On the fiscal front, the IMF praised the government’s targeted and temporary response to recent energy price shocks, describing it as aligned with international best practices. Nevertheless, it stressed the importance of continued efforts to contain operating expenditure and improve public-sector efficiency while cautioning against indiscriminate workforce reductions. The IMF also urged ongoing fiscal discipline, warning that persistent budget deficits and demographic pressures, such as an ageing population, necessitate reforms to safeguard fiscal buffers and manage future risks.

Reform of the superannuation system featured prominently in the IMF’s recommendations, which include considering raising the retirement age and introducing means testing to help achieve surpluses. While the fund welcomed recent initiatives to increase KiwiSaver contribution rates and participation, it endorsed further improvements to strengthen long-term savings. Tax reform was also highlighted as essential to reducing distortions in the economy. The IMF suggested exploring a comprehensive capital gains tax and adjustments to land value taxation to boost revenues and address issues such as overinvestment in housing. However, it acknowledged that such changes involve complex trade-offs between equity and efficiency and would require careful design.

Structural reforms beyond fiscal measures were deemed critical for sustaining productivity growth. The IMF identified areas such as deepening domestic capital markets, enhancing competition, and boosting foreign investment as priorities. It also noted that while New Zealand is advancing in adopting artificial intelligence (AI), the labour market consequences could be significant, with up to one-third of workers potentially affected. The overall employment impact will depend on whether productivity gains translate into new job opportunities and how effectively workers can transition to different roles.

Political responses to the IMF’s recommendations vary. Some parties support raising the age of eligibility for New Zealand Superannuation and increasing KiwiSaver contributions, while others oppose changes to superannuation entitlement or mandatory membership. Perspectives also diverge on tax reform, government spending, and the role of state intervention in the economy, with differences evident across the political spectrum.

The IMF underscored the importance of safeguarding the independence of the Reserve Bank to maintain monetary policy credibility amid heightened uncertainty and frequent shocks. The review, based on consultations with government officials, parliamentarians, analysts, business groups, and unions, concluded that while New Zealand’s economy is resilient, continuous efforts to address structural issues and external risks are necessary to support a stable and inclusive recovery.