I was reminded of option (2) when Matthew Hooton recently (January 30, 2026) mentioned how the New Zealand National-led coalition Government’s last tax cuts would not have been helpful for the Reserve Bank at a time it was trying to lower inflation by raising the OCR.
I suspect that varying the OCR might be more welcomed by banks than their customers. Certainly, deliberately changing interest rates to influence business investment and employment numbers does have negative aspects.
Therefore, wouldn’t it be interesting to try options (2) or (3) to find out if overall they offer less downsides and are more equitable than the boom and bust cycles of option (1)? If the Reserve Bank does not have the authority to apply options (2) and/or (3), I wonder why not?
Cheers, Lindsay Wyborn
A: Thanks Lindsay,
I don’t usually tackle unorthodox monetary policy ideas, but this one keeps coming up over and over again and clearly has some logic to it – in theory at least.
I also think it provides a good chance to step back and look at how monetary policy works and what it is trying to achieve.
After that, I’ll run through some pros and cons, and people can make their own minds up about whether we should overhaul our system.
At its core, monetary policy is a device to control money supply with the goal of maintaining price stability – ie low inflation.
By adjusting the Official Cash Rate, the cost of borrowing rises or falls.
That takes money out of the pockets of those with debt and discourages borrowing – the effect is to curb the amount of money in circulation and puts downward pressure on inflation.
I’ve heard people argue that is unfair. Even central bankers will concede it is a blunt instrument.
So one alternative suggestion might be for the Government to adjust our KiwiSaver contributions up and down to suit economic conditions.
The idea is that KiwiSaver contribution rates be raised when the economy overheats.
This would take money out of the system to curb inflation with the added benefit of boosting our savings. We wouldn’t actually lose any money.
You could make the case that the transmission of the policy effects would be more direct and quicker.
It takes a while for OCR changes to work through to borrowers – especially when people are fixed on longer-term mortgage rates.
Some might argue it was also more equitable as we wouldn’t be piling the burden of monetary policy on those with the largest mortgages – typically young people starting out on the property ladder.
It would probably work better if we had a compulsory savings scheme but there are high enough rates of KiwiSaver. Not everyone has a mortgage after all.
But I think what is forgotten in this debate is that the other side of the interest rate equation in our current monetary policy system.
When borrowing costs rise, wealth isn’t being lost from the system. We’re just losing cash from circulation. The money isn’t flowing directly to bank profits.
That’s because saving deposit rates also rise.
This has the added benefit of incentivising more people to save, which also sees money removed from circulation.
Ultimately this is much the same thing as might be achieved with adjustments to savings rates.
I think that it is a lot easier to administer through the financial markets where central banks have the advantage of being the lender of last resort.
Just think about the complexity for employers if contributions to KiwiSaver had to be adjusted every time inflation rose or fell.
The same level of complexity counts against using tax changes as a primary mechanism for controlling the money supply.
As to your specific question about why the central bank doesn’t have the power to move tax rates, the simple answer is that this is fiscal policy and has always been the realm of governments which need to be able to raise enough revenue to keep the country working.
It is useful for fiscal policy settings to provide support for monetary policy.
There’s an old saying: monetary policy needs mates (sometimes attributed to former finance minister Ruth Richardson).
Frankly, it’s been a criticism of this Government and the last that fiscal policy settings haven’t been friendly to monetary policy.
Fiscal policy has been out of sync with monetary policy goals.
The last Government kept spending when the economy was clearly in expansion, and the current Government has cut that spending back at a time when the economy was contracting.
Columnist Matthew Hooton was making the point that the tax cuts in 2024 weren’t well timed given the RBNZ was still trying to restrict the money supply and beat inflation at the time.
But governments typically adjust taxes with much longer horizons in mind.
When fiscal policy does work in tandem with central bank monetary policy it is usually via the ebb and flow of government spending.
I guess a government could, in theory, adjust tax rates on a regular basis to maintain price stability but it would be a hell of a thing to get used to.
Inflation worries
Q: Back in the second half of 2025 all the commentary was that the RBNZ could see a “temporary spike” in inflation approaching yet they lowered the rate further…now they are worried about inflation sitting too high. Please address this Liam. What changed?
Andrew G
Interesting question, not least because there are actually some concerns that the Reserve Bank may be underplaying inflation risk in the latest outlook.
With regard to inflation, I’d say that roughly the same narrative is still prevailing from last year.
That is to say inflation remains elevated, but the central bank and most economists still have confidence that it will fall in the coming months.
Persistently high food prices and other fixed costs (like council rates and power prices) have pushed inflation above the upper end of the 3% Reserve Bank target band.
But that is expected to be a temporary spike.
The RBNZ forecasts inflation will fall from its current annual rate (3.1%) to 2.7% by June.
That’s because they still see spare capacity (things like high unemployment and a lacklustre construction sector) in the economy, pushing inflation down.
While the economy is recovering, it is not yet at its limits of potential growth.
The talk that has emerged this year about when we’ll see the OCR rise does relate to the longer-term inflation risks that will emerge when our economy is humming again.
If the RBNZ left interest rates at stimulatory levels once the economy was growing strongly, we’d see inflation embed itself back in the core of the domestic economy as it did in 2022.
Reserve Bank Governor Anna Breman. Photo / Mark Mitchell
But there are questions being raised about whether the RBNZ is too relaxed about the current elevated inflation.
As the economy picks up speed, the window for it to fall back into the target band is narrowing.
Economists at Infometrics have warned that the RBNZ is underplaying the risk.
“The Reserve Bank held the Official Cash Rate at 2.25% last week, commenting that “risks to the outlook for inflation are balanced,” wrote Infometrics’ Rob Heyes.
“Our concern is that inflationary pressures are already evident in the economic data.”
If we don’t see inflation numbers coming down in the next few months then the Reserve Bank may have to accelerate the timing and intensity of rate hikes.
Green shoots watch
It has been a quiet week for domestic economic data since the RBNZ left the OCR on hold last Wenesday.
But Monday saw some very strong retail trade data released by Stats NZ which added further weight to the consumer recovery story.
Retail sales figures for the fourth quarter of 2025 landed better than economists had been expecting, quite a bit better.
“We were looking for today’s Q4 retail trade data to show a modest gain and add evidence of the economic recovery,” BNZ economist Matt Brunt said.
“The 0.9% q/q lift in retail sales volumes did this and more. The solid bounce back over 2025 continued to surprise on the topside, especially when considering that sales volumes rose a very strong 1.9% in Q3.”
Kiwis have been buying couches (and other homeware), which is especially pleasing to see.
Economists see the “durables category” as the best indicator of consumer confidence for some reason.
I guess because we just live with our old stuff for longer when times are tough.
“The strength in spending on durables suggests a decent chunk of the strength in retail was domestically generated,” Brunt said.
“In the February MPS, the Reserve Bank noted household caution as one of the major risks to the New Zealand economy. Today’s data will help alleviate some of these concerns,” Brunt said.
Westpac senior economist Satish Ranchhod was also enthused by the result.
“Looking ahead, the RBNZ has signalled that the easing cycle has come to an end,” he said.
“However, many households are still rolling off earlier higher fixed mortgage rates and are refixing, and at lower ones, in some cases, at rates that are 100 to 200 basis points lower. That process will continue for several months yet. And the related easing in average borrowing costs will help to support spending through 2026.”
Liam Dann is business editor-at-large for the New Zealand Herald. He is a senior writer and columnist, and also presents and produces videos and podcasts. He joined the Herald in 2003.
To sign up to his weekly newsletter, click on your user profile at nzherald.co.nz and select “My newsletters”. For a step-by-step guide, click here. If you have a burning question about the quirks or intricacies of economics send it to liam.dann@nzherald.co.nz or leave a message in the comments section.