Economic outlook and monetary policy

The International Monetary Fund has released its annual assessment of New Zealand's economy, concluding the country likely contracted in the second quarter as disruptions from Middle East conflict affected growth.

The fund revised its 2026 growth forecast down to 2%, with 2027 growth expected at 2.7%. The economy had been expanding at the year's start before the conflict and oil shock hit.

Inflation is expected to peak around 4% before declining to the RBNZ's 2% target next year. The IMF called on the Reserve Bank to begin lifting the official cash rate soon to reach neutral levels, estimated at around 3%, by year-end.

IMF New Zealand country manager Yan Carriere-Swallow said the central bank would need to act quickly if inflation became more broad-based and entrenched. The Middle East conflict has reduced disposable income and raised input costs for firms, while elevated uncertainty is affecting business confidence, investment decisions and household consumption.

Fiscal reforms and workforce reductions

The IMF called for structural reforms to tackle government deficits and rebuild financial buffers. Carriere-Swallow urged the government to carefully prioritise workforce reductions to protect highest value uses.

"While the efforts to contain operating expenditure and improve public-sector efficiency are welcome and should continue, workforce reductions should be carefully prioritised and sequenced to protect the highest value uses," he said.

Superannuation and retirement policy

The fund renewed its call for superannuation reforms including raising the retirement age and means testing. Carriere-Swallow said the issue was becoming urgent in the context of returning to budget surpluses.

"Such reforms need to be signalled early and carefully designed to distribute the adjustment across generations, preserve retirement-income adequacy, and support capital market deepening by mobilising long-term private savings," he said.

The IMF endorsed recent moves to strengthen KiwiSaver contribution rates and participation.

Tax reform recommendations

The fund recommended the government introduce a comprehensive capital gains tax as part of revenue reforms, alongside reforms to land value taxation.

Carriere-Swallow said tax reform would reduce distortions such as over-investment in housing.

AI and productivity

The IMF recommended New Zealand adopt artificial intelligence to drive growth, noting potentially one-third of workers could be affected by AI adoption.