RBNZ eyes lower interest rate path if tax reforms can lift savings rate (Update 1)

The Reserve Bank has said it may be able to keep the interest rate path and the exchange rate lower if work by the Tax Working Group, the Capital Markets Taskforce and the 2025 commission led to an overall increase in national saving. (Update 1 includes chart.) Here are the Reserve Bank's comments on fiscal and tax policy:

The Reserve Bank is interested in fiscal and tax policy settings because government spending, and the overall level of taxes influence:

• Aggregate demand pressures in the economy, and:
• The incentives for spending and saving, which over time affect potential or trend growth and the average level of interest rates.

As a result, any policy action taken in response to the work of these groups together with the government's budget decisions, will affect how hard monetary policy has to work to achieve price stability and potentially where the burden of adjustment falls Faster fiscal consolidation would reduce aggregate demand pressures in the economy. If this led to an overall increase in national saving it would reduce the extent to which interest rates need to lean against inflation pressures. Other things being equal, a lower interest rate path would likely contribute to a lower exchange rate. The tax system also influences cyclical pressures in the economy. Our assessment is that the current system exacerbates the economic cycle through its impact on saving and investment decisions, particularly the way it encourages demand for housing.