As featured by the BusinessDesk on 27 October 2025.

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The recent Reserve Bank of New Zealand decision to cut the official cash rate by 0.5% has me in two minds.

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On the one hand, New Zealand’s economy needs a boost, and lowering the cost of servicing our household debt will no doubt help in the near term.

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But, on the other hand, it’s unlikely to lift our economy in any sustainable way. In fact, if history is anything to go by, it’s more likely to reduce the country’s future potential growth rate.

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Monetary theory has fundamentally backfired

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Ever since the Reserve Bank of New Zealand (RBNZ) Act was passed into law in 1989, our overnight interest rate has been set to deliver a desirable level of inflation (and previously employment) over the medium-term.

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To achieve this, most advanced economies, including NZ, follow a model which goes like this: lower economic growth and/or inflation → the RBNZ lowering interest rates → more borrowing → more spending → higher employment, growth, and inflation.

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It’s a measurable and worthy goal backed by well-established economic theory.

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However, the inconvenient truth is that it just doesn’t work that way in reality. That’s because the spending that typically occurs in NZ when interest rates are cut isn’t a productive investment. Instead, we tend to borrow to consume, and when we do invest, it’s often to buy unproductive assets like residential property.

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Borrowing for consumption, not creation

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In an economy like ours, where savings mostly flow into existing assets, rather than building new productive ones, the boost to the economy from lower interest rates will always be short-lived.

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That’s because borrowing to consume or to buy a house simply brings forward tomorrow’s spending into today, lowering future spending without creating an earnings stream to pay back the debt that has been created.

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And the cheaper money gets, the greater the speculation – lifting asset prices further, which piles more debt onto households and widens the wealth divide further.

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The covid crisis was an extreme but crystal clear example of this.

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By slashing the official cash rate (OCR) to a record low of 0.25% and pouring billions into bond markets to “support demand”, the RBNZ single-handedly lifted house prices more than 40% in just two years.

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Without more investment, the future looks bleak

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Investment in new machinery, technology, and systems is what increases a country’s growth potential and lifts productivity over time. In short, investment turns effort into progress.

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And without it, economies stall, as the International Monetary Fund recently highlighted, with falling productivity accounting for about half the slowdown in global growth over the past 20 years.

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Productivity is the key to unlocking prosperity

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Dealing with big issues requires some big calls, and I think the Government should seriously consider changing (or at least adding to) the RBNZ’s mandate to focus on promoting productivity through investment.

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I know that might sound crazy, not least because multi-factor productivity can’t even be precisely measured. But not everything important is measurable. And success here could deliver the holy grail of monetary policy: strong, steady growth without inflation.

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That’s because when businesses make more with the same resources, they can pay workers more and hire more people without raising prices to generate more profit.

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In the long term, this could have a profound impact – reducing inequality and helping solve our household debt problem – as we become less reliant on borrowing to maintain our standard of living.

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The RBNZ can strongly influence productivity

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While no single person or entity can raise productivity on their own, we all have a role to play, especially the RBNZ. This is because of the influence the RBNZ can have in fostering the necessary conditions.

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First, the OCR could be maintained at a level that encourages long-term productive investment. That means less tinkering and less reflexivity to financial market volatility.

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A more stable cash rate would give businesses the confidence to invest in high-value, longer-term projects.

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Second, the RBNZ could ensure that positive real (inflation-adjusted) interest rates become the norm. By keeping the cost of borrowing consistently higher than inflation, this would incentivise saving and investment over lending and speculation.

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And thirdly, the RBNZ could help direct credit (ie, borrowed money) towards productive areas of the economy through its wide-ranging macroprudential and regulatory powers.

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This could be achieved by tightening capital requirements for lending to unproductive sectors, while relaxing them for investment in areas such as innovation, technology, and infrastructure.

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Now is the time to reset and reconfigure the way interest rates are set

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NZ’s productivity growth has been falling for decades, and the decline has deepened over the past ten years. This has created an unequal, debt-laden, and under-invested economy.

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To turn this troubling trend around, bold action is required. My hope is our reform-focused Government and a courageous new RBNZ governor could be just what’s needed to usher in a new era of growth, prosperity, and competitiveness for NZ.

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