An International Monetary Fund mission led by Yan Carrière-Swallow and comprising Matteo Ghilardi, Yaroslav Hul, and Marina Mendes Tavares held discussions in Auckland and Wellington during June 18-July 1 for the 2026 Article IV consultation with New Zealand. The mission met with Minister of Finance Hon. Nicola Willis, Governor of the Reserve Bank Anna Breman, Secretary to the Treasury Iain Rennie, other senior officials, Members of Parliament, analysts and think tanks, trade union representatives, and business groups. At the conclusion of the visit, the mission issued the following statement:
Highlights
- New Zealand’s economic recovery is being delayed by the oil price shock and elevated uncertainty, while inflation is expected to remain temporarily above the RBNZ’s target band.
- Macroeconomic policies face difficult trade-offs. Monetary policy should gradually withdraw policy accommodation to ensure medium-term price stability. While fiscal consolidation has been delayed due to the prolonged slowdown, buffers should be rebuilt as growth recovers.
- The authorities’ targeted and temporary response to the oil price shock has been designed in line with international best practice.
- The New Zealand economy is being subjected to frequent shocks, underscoring the importance of the strong policy framework that underpins macroeconomic stability: a flexible exchange rate regime, strong fiscal buffers, and credible central bank.
- Structural reforms remain critical to lift productivity and living standards, and to strengthen resilience.
A Nascent Recovery Faces Another Setback
New Zealand’s recovery was finding its footing in early 2026, before the onset of the Middle East war. Following a prolonged period of low growth, the economy had begun to recover in late 2025, supported by easing debt-service costs and strong commodity prices, reaching 1.5 percent annual growth in 2026Q1. The recovery, however, remained uneven across sectors and regions, with services expanding steadily, while the construction and manufacturing sectors remained subdued. Labor market conditions continued to loosen and wage growth slowed, indicating considerable slack in the economy. The current account deficit improved in 2025 on favorable export prices, subdued import demand, and a weaker New Zealand dollar.
The war’s disruption of global energy markets and supply chains has increased uncertainty, raised prices, and delayed the recovery. The increase in global oil prices raised domestic fuel prices by 37 percent and doubled diesel prices by mid-April, though these increases have eased significantly in recent weeks. This is weighing on New Zealanders’ disposable income and raising input costs for New Zealand firms. There are signs that elevated uncertainty is affecting business confidence, investment decisions, and weakening household consumption.
Inflation had risen above the Reserve Bank of New Zealand’s target band, with price pressures intensifying following the oil price shock. Headline inflation remained at 3.1 percent y/y in 2026Q1, as higher energy prices pushed up tradables inflation and administered prices remained elevated, while core inflation trended down. The RBNZ had eased policy rates through 2025 as slack in the economy widened and inflation expectations remained anchored, adopting an accommodative monetary policy stance that transmitted to lower mortgage rates and supported credit growth. Since the onset of the war, the RBNZ has held rates constant at its April and May meetings as oil-related price pressures increased.
Fiscal policy has avoided procyclical tightening while laying the ground for medium-term consolidation. In FY2024/25-FY2025/26, the deficit widened by less than expected at the time of the 2025 Article IV, supported by stronger consumption and higher prices, and lower-than-planned spending. However, the stance is estimated to have remained mildly expansionary, with automatic stabilizers providing support to the economy. Net public debt continued to increase, estimated to have reached 27 percent of GDP at the end of FY2025/26. In response to the shock, the authorities have introduced a temporary support package targeted to vulnerable households with children, financed within the budget envelope.
Outlook and Risks
While the outlook is subject to elevated uncertainty, the recovery is expected to resume in the second half of 2026. Under staff’s baseline, conditions in global energy markets are expected to continue normalizing. Output in New Zealand is estimated to have contracted in 2026Q2 but is projected to recover in subsequent quarters, with growth projected at 2 percent in 2026. Growth is expected to strengthen further to 2.7 percent in 2027 as pent-up demand and business confidence recover, supported by continued strong exports of agricultural products and tourism. Inflation is projected to rise temporarily to around 4 percent in mid-2026 and remain above the RBNZ’s target band until end-2026. Inflation is expected to return to the midpoint in the second half of 2027, as the oil shock dissipates and the negative output gap helps contain domestic price pressures. The current account deficit is expected to continue to narrow over the medium term as the terms of trade strengthen and fiscal consolidation boosts domestic savings.
Risks to staff’s growth forecast are tilted to the downside, particularly in the short term, while risks to inflation are tilted to the upside. Inflationary pressures could prove to be more persistent and broaden, particularly if a renewed escalation of geopolitical tensions pushes oil prices high again, weakening the recovery. The more frequent materialization of external shocks, including geoeconomic fragmentation, trade disruptions, and natural disasters, poses continuous risks. Conversely, a stronger transmission of monetary accommodation, or productivity gains from structural reforms could support a quicker rebound.
Policies to Build Resilience and Lift Potential Growth
Budget 2026 appropriately balances the need to support the recovery with medium-term consolidation, while preserving space for priority investment in infrastructure and resilience. It avoids procyclical tightening and is expected to deliver a neutral fiscal stance in FY2026/27. Continued expenditure restraint is supported by a multi‑year public service reform program aimed at improving efficiency, expanding digitalization, and containing administrative costs. This includes a gradual reduction in public service employment toward its historical norm. While the efforts to contain operating expenditure and improve public-sector efficiency are welcome and should continue, workforce reductions should be carefully prioritized and sequenced to protect the highest value uses, preserve implementation capacity, and ensure durability of generated savings. The budget also increases the capital spending envelope, supporting infrastructure and resilience investment in transport, health, education, energy security, and defense.
The authorities’ targeted and temporary response to the oil price shock has been designed in line with international best practice. New Zealand is among a small group of countries that responded with targeted, temporary cash transfers financed within existing budget envelopes, while avoiding generalized price subsidies. The measure effectively supports vulnerable households with children while prices are elevated, preserving price signals that incentivize energy demand adjustment—which helps prevent shortages from occurring—and its modest cost avoids creating inflationary pressures and preserves fiscal space.
Persistent deficits since the pandemic have reduced fiscal space, and a turbulent external environment underscores the importance of rebuilding buffers. While New Zealand still has a comparatively low debt-to-GDP ratio and enjoys favorable financing costs, it is subject to an environment of more frequent shocks and rising global fiscal pressures. About half of the public debt is held by non-residents, which supports market liquidity in the context of a shallow pool of domestic savings, but amplifies the sensitivity of New Zealand’s sovereign yields to shifts in global financial conditions. Staff estimate that the term premium on 10-year New Zealand government bonds has risen since mid-2024, which has largely offset the decline in risk-neutral rates delivered by the RBNZ’s easing cycle. Maintaining adequate fiscal space is critical to contain the interest bill and to enable timely and sufficient policy responses to future shocks—including from natural disasters—without jeopardizing fiscal sustainability.
The authorities’ fiscal strategy is appropriately ambitious and should remain the anchor for fiscal policy, with expenditure-based consolidation complemented by revenue measures. Achieving operating surpluses will require sustained discipline over successive budgets, particularly given building pressure from New Zealand Superannuation (NZS) payments and defense commitments. While continued expenditure discipline should remain central to the medium-term consolidation efforts, relying on expenditure restraint alone could increasingly weigh on the quality and delivery of public services, especially in the face of rising ageing-related spending pressures. An adjustment strategy that includes a broader set of expenditure and revenue measures would distribute the effort across fiscal instruments, strengthen the credibility of the fiscal anchor, and help reduce distortions in the tax system. On the expenditure side, further efficiency gains and reprioritization could be achieved through systematic cost-benefit reviews of government programs while safeguarding growth-enhancing public investment, expenditure on essential services, and protection of the most vulnerable. While revenue reforms also introduce efficiency and equity trade-offs that would need to be carefully assessed, potential measures could include a comprehensive capital gains tax and reforms to land value taxation. Any revenue overperformance should be saved to accelerate buffer rebuilding.
Addressing aging-related spending pressures will be important to safeguard long-term fiscal sustainability. Under current settings, NZS costs are projected to rise significantly over the long term, with additional pressures from health and elderly care. A gradual and balanced reform package should include changes to NZS settings and further strengthening of KiwiSaver, including further increases in contribution rates and measures to boost participation. Such reforms need to be signaled early and carefully designed to distribute the adjustment across generations, preserve retirement-income adequacy, and support capital market deepening by mobilizing long-term private savings.
Monetary policy faces a difficult trade-off as the oil price shock raises already-elevated inflation while the output gap remains negative. The uncertain environment calls for nimble and data-dependent monetary policy that monitors price developments closely, which will be facilitated by Stats NZ’s introduction of a monthly CPI in 2027. In this context:
- In the baseline scenario, monetary accommodation should be gradually withdrawn, with the policy rate converging to a broadly neutral stance by end-2026. This would balance support for the recovery with the need to keep inflation expectations well anchored, and position monetary policy to respond less abruptly in a risk scenario where inflationary pressures prove more persistent than expected, core inflation begins to accelerate, or medium-term expectations start to de-anchor.
- In a risk scenario where inflation pressures prove more persistent, core inflation accelerates, or expectations begin to de-anchor, monetary policy should tighten into restrictive territory. This would require a policy rate path that rises faster and to a higher level than in the baseline.
In an environment of elevated uncertainty and more frequent shocks, safeguarding the credibility of the monetary policy framework is essential. Credibility of the monetary policy framework should continue to rest on the RBNZ’s operational independence in the pursuit of price stability. Following several changes since 2018, maintaining stability in the RBNZ’s objectives and Remit between regular reviews would help markets and the public better understand the monetary policy reaction function. The new MPC Charter further strengthens the transparency and accountability of monetary policy, including through more detailed disclosure of voting records and the views of individual MPC members. Clear communication and consistent implementation of the Charter should help improve the predictability of RBNZ decisions, which will help keep expectations well anchored.
Financial stability risks remain contained, and macroprudential settings are appropriate. Banks remain well capitalized, liquid, profitable, and supported by stable funding conditions. Macroprudential settings remain appropriately calibrated given still moderate credit growth and broadly stable housing market conditions. Progress in strengthening the regulatory framework is welcome. The launch of the Depositor Compensation Scheme fills an important gap in depositor protection, and implementation of the Deposit Takers Act should continue in a proportionate way across bank and non-bank deposit takers. The recalibration of prudential capital requirement settings appropriately safeguards financial stability while supporting greater competition, lower funding costs, and expanded credit provision over time.
While housing affordability has improved, reforms should continue to focus on durably easing supply constraints. House prices and debt-servicing pressures have eased, but housing remains expensive relative to incomes. Residential construction activity moderated in recent years, reflecting higher interest rates and softer migration, although earlier land-use reforms in Auckland and Canterbury have helped ease housing supply constraints. The Going for Housing Growth agenda, Resource Management Act reforms, targeted densification measures, and new infrastructure funding tools for local councils are welcome.
A broad structural reform agenda remains critical to lift potential growth and living standards. Recent reforms have helped ease foreign investment screening, support business investment, strengthen capital markets, and modernize competition settings. However, weak labor productivity growth, low capital intensity, limited innovation, and constraints on firm scale-up continue to weigh on medium-term prospects. Broad-based reform efforts should focus on deepening domestic capital markets, strengthening product market competition, easing barriers to foreign direct investment and technology diffusion, and improving regulatory settings and public investment management.
Reviving productivity growth will require deeper and more efficient domestic capital markets to support sustained capital accumulation. New Zealand’s reliance on bank-based financing and limited access to risk capital constrain firms’ ability to invest, innovate, and scale up, and lead to dependency on foreign savings that exacerbates external imbalances. In this context, policies that strengthen the incentives and conditions for investment are critical, including improving access to long‑term finance, reducing regulatory barriers to business expansion, and fostering competitive product and labor markets. The increase to KiwiSaver contribution rates in Budget 2025 is a welcome step toward expanding the pool of long-term private pension savings, which remains much smaller than in peers, and further reforms should be considered to continue deepening domestic capital markets.
Adoption of artificial intelligence can boost productivity and growth, but uncertainty around its productivity and distributional effects makes support for displaced workers important. New Zealand’s labor market structure suggests substantial potential gains from AI adoption, though one third of workers face displacement risks that are particularly acute among females and younger cohorts. The overall employment effects will depend on whether AI-related productivity gains generate sufficient demand and new job opportunities for these workers, and on how easily they can transition to other occupations.
Realizing these gains will depend on AI preparedness and structural reforms to support widespread adoption. New Zealand ranks in the top ten globally on the IMF AI Preparedness Index. Performance is particularly strong on regulatory quality and human capital, while there is scope to improve digital infrastructure and innovation outcomes. At the same time, longstanding structural impediments—high costs and administrative burdens of starting and scaling a business, low R&D intensity relative to peers, high and volatile electricity prices, and shallow capital markets that constrain access to risk finance—are likely to also weigh on the speed of AI adoption across firms, particularly among SMEs. New Zealand is making progress in adopting AI-related capabilities, but job-posting data shows somewhat less local demand for AI-related skills than in leading advanced economies. Continued progress on the structural reform agenda—including the Commerce Act review, Capital Markets Reforms, and review of R&D tax incentives—would help New Zealand convert its strong AI preparedness into economic gains.
read more: https://www.imf.org/en/news/articles/2026/06/30/cs-06302026-new-zealand-concluding-statement-of-the-2026-aiv-consultation-mission
