(Bloomberg) -- The Reserve Bank of New Zealand has limited scope to cut interest rates this year and shouldn’t ease policy until it’s sure inflation will return to target, according to the Organisation for Economic Cooperation and Development.

“Inflation is likely to be persistent,” the OECD said in its Economic Surveys: New Zealand 2024 report published Monday in Wellington. This “limits the scope for lowering the Official Cash Rate in 2024 and it should remain constant at 5.5% until there is clear evidence that inflation will fall to the middle of the RBNZ’s target range,” it said.

At 4% in the first quarter, headline inflation is still above the RBNZ’s 1-3% target band and twice its 2% goal, while a measure of domestic price pressures remains elevated at 5.8%. Most economists expect the RBNZ will start to cut the OCR late this year, but several argue a pivot will now be delayed until 2025.

The OECD said monetary policy needs to remain data dependent and there is uncertainty about when inflation will reach the central bank’s target range. The government also needs to get spending under control to reduce the budget deficit and help the RBNZ to tame inflation, it said. 

Finance Minister Nicola Willis in March said she is aiming for a budget surplus in 2028 — a year later than previously projected because of weaker economic growth and revenue. Still, she is pledging income tax cuts in her May 30 budget.

“The government should set operating allowances and tax policies that will gradually reduce the fiscal deficit to reach budget balance,” the OECD said. “Any tax cuts should be fully funded by offsetting revenue or expenditure measures.”

The Paris-based OECD projects modest economic growth of just 0.8% in the year through December 2024, lifting to 1.9% in 2025.

A growing shortage of housing and rising house prices and rents are expected to eventually stimulate housing construction, while higher growth in demand from trading partners, and especially the recovery in tourist arrivals, will help to boost exports, it said. 

In a wide ranging report, the OECD also:

  • Said the government could benefit from having a defined spending growth target, arguing a framework that focuses fiscal targets on the operating balance and debt but not expenditure is insufficient
  • Urged creation of an independent fiscal institution reporting to parliament to assess policies
  • Argued for the introduction of a capital gains tax to reduce distortions to household choice of asset allocation
  • Said macroeconomic statistics should be given higher priority because of their fundamental importance for policy, noting New Zealand’s lack of monthly CPI and unemployment data
  • Said productivity remains substantially below the OECD frontier, partly due to insufficient competition. Market concentration should be addressed through facilitating entry, effective regulations, antitrust enforcement and, as a last resort, break-ups. The foreign direct investment regime — “one of the most restrictive in the OECD” — should be eased
  • Noted New Zealand’s current account deficit is still one of the highest in the OECD and while it is narrowing, part of it is structural and it is likely to remain higher than the long-run average until the government shrinks its fiscal deficit further

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