The International Monetary Fund (IMF) says an Official Cash Rate (OCR) in New Zealand of 3.25% by the middle of this year would be "appropriate".
However, it says given the "propensity" in this country for rapid housing credit growth, the Reserve Bank (RBNZ) should monitor the effect of its easing and make full use of its macroprudential toolbox to control the emergence of risks. (The macroprudential tools include the loan to value ratio, or LVR, limits and the debt-to-income, or DTI, limits introduced last year.)
The IMF comments come on the conclusion of its annual monitoring mission to New Zealand.
The RBNZ has already cut the OCR from the cycle high of 5.5% to 3.75% and has strongly suggested that further 25-point cuts will be made at its reviews in both April and May. This would therefore take the OCR to 3.25%.
In a statement released on Wednesday, the IMF said an OCR of around 3.25% by mid-2025 should be appropriate to keep inflation within the 1% to 3% target band, "if economic conditions progress as expected".
However, it says the "significant, rapid, and anticipated cuts in monetary policy" could cause the passthrough to economic activity to be faster than during previous cycles.
It notes that many households have shifted toward short-term fixed-rate mortgages in anticipation of monetary easing, with over 70% scheduled to reprice this year.
'A guardrail against a buildup of risk'
"Given the chronic housing shortage, the already high household leverage, and the propensity in New Zealand for rapid housing credit growth, the RBNZ should monitor the effect of its easing and make full use of its macroprudential toolbox to control the emergence of risks.
"In this context, the activation of debt-to-income limits serves as a guardrail against a buildup of risk, while offering banks limited countercyclical room to lend to higher-risk borrowers."
Monetary policy should remain "flexible and responsive" to the rapidly developing economic conditions. And in reference to the recent sudden resignation of RBNZ Governor Adrian Orr, the IMF says the RBNZ "is expected to ensure continuity in carrying out its policies and operations amid the changes in its leadership".
The IMF sees unlocking housing supply growth in New Zealand as a key priority.
It says ongoing policy work to amend and eventually replace the Resource Management Act has the potential to improve planning efficiency.
"Bold reforms are needed to free up land supply, incentivize efficient land use, and ensure adequate financing of local infrastructure.
High-density housing
"Allowing for more construction of high-density housing can also support supply. The government’s nascent Going for Housing Growth programme aims to tackle some of these challenges."
The IMF notes that steady progress is being made in implementing reforms to boost financial stability. Implementation of the 2019 capital review is progressing in line with expectations.
"The Depositor Compensation Scheme is on track for a July 2025 launch, to be funded by a risk-based levy framework which appropriately aligns costs with risks.
"Public consultations around the prudential standards under the Deposit Takers’ Act are ongoing.
"Incorporating smaller non-bank deposit-takers into prudential regulation in a proportionate way remains a key consideration.
"In this context, reforms are expected to include graduated requirements by different entity sizes, reevaluation of minimum capital levels for new entrants, and additional granularity in standardised risk weights."
Banking competition policies 'need to be carefully designed'
The IMF says that Government policies to strengthen banking competition "will need to be carefully designed to preserve the primacy of financial stability".
Encouraging stronger competition for deposits and loans can be achieved through measures including faster adoption of open banking, reducing regulatory barriers to entry, enhancing fee transparency, and making it easier to switch providers.
Efforts to attract a private capital injection for Kiwibank could allow the bank to boost its lending activity.
"The primary objective of prudential regulation should be to safeguard financial stability, calibrated to the risks and vulnerabilities faced by New Zealand."
The IMF sees NZ's GDP growing 1.4% this year and 2.7% next year.
It says the Government's fiscal policy "should balance medium-term consolidation with near-term support to the economy".
Any chance of a capital gains tax?
It's become a regular part of these annual reviews that the IMF suggests a capital gains tax - and this year is no exception. (The Government politely declined the suggestion last year and will presumably do the same again this year.)
But the IMF presses on:
"The authorities’ fiscal strategy should include broader tax policy reforms and initiatives to address long-term spending pressures. New Zealand has an efficient consumption tax system, low labor tax wedge, relatively high corporate income tax, and uneven capital income taxation," the IMF says.
"Tax policy can support a more growth-friendly fiscal consolidation, and reforms aimed at improving the tax mix can help increase the efficiency of the income tax system while reducing the cost of capital to incentivise investment and foster productivity growth."
Options included a comprehensive capital gains tax, a land value tax, and judicious adjustments to the corporate income tax regime.
"The growth implications and distributional effects of these reforms should be carefully considered to inform the design of policies. In the long term, population aging will increase superannuation costs and place significant pressure on the budget."
Early dialogue 'essential'
The IMF says it is "essential" to initiate early dialogue among all stakeholders regarding comprehensive reform options that can help mitigate these challenges (and other long-term spending pressures from healthcare and aged care needs) with fair burden-sharing across generations.
"This can be further supported by KiwiSaver (a voluntary savings scheme) reforms aimed at achieving greater private retirement savings."
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The IMF sees unlocking housing supply growth in New Zealand as a key priority.
It says ongoing policy work to amend and eventually replace the Resource Management Act has the potential to improve planning efficiency.
"Bold reforms are needed to free up land supply, incentivize efficient land use, and ensure adequate financing of local infrastructure.''
But you know that land is not 'supplied', don't you Mr Hargreaves. Or you should. It is all doing something NOW. And to make matters worse, we are using historical acres (millions of sunlit years thereof) to put the infrastructure onto the real-time acres. How about ascertaining how long that expansion lasts, and what happens then?
The IMF, in the big picture, know diddly-squat.
Edit - and it's NOT financing that infrastructure needs; it's energy and resource allocation, both for the build and for future maintenance. Can you point us to your research on both input requirements, please?
At least they are saying we have to put instruments in place to prevent rampant house price speculation. Almost and admission that previous plicy settings have caused at least some of the current affordability problem.
You could say that banking, as an institution, has been part of the 'affordability' problem.
They syphon-off their cut of other people's 'income' - all eventually traceable to energy/resource flows. Even Interest.co here, can be said to be adding to house prices, as with my local rag, the ODT - pages and pages of RE on a Saturday, without which they're not so viable.
"Given the chronic housing shortage, the already high household leverage, and the propensity in New Zealand for rapid housing credit growth, the RBNZ should monitor the effect of its easing and make full use of its macroprudential toolbox to control the emergence of risks.
Emergence of risk? There is already risk in the level of private debt. The solution of course is to pay down said debt, which goes against the debt model. The system relies on borrowing more and spending more, consuming more, and more, and more. It isn't realistic. NZ needs to reduce private debt, manufacture more, import less, and live with less to be better off long term, however this again, goes against the confidence many have in trading the NZD and would likely impact the cost of imports again. Quite the conundrum.
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