Is Raising Interest Rates Really the Only Way to Fight Inflation?

Every time inflation nudges above the Reserve Bank's 1–3% target band, we hear the same refrain: raise the OCR. It's become New Zealand's default response to rising prices — a blunt, well-worn tool that we reach for almost reflexively. But with our economy in a fragile state and some of our sharpest banking economists now openly warning against further hikes, it's worth asking: is this really the only lever we have? And what might we learn from countries that do things differently?

Where We Are Right Now

The numbers don't make comfortable reading. Annual inflation sits at 3.1% — just outside the RBNZ's target band — driven largely by higher food prices, electricity costs, and council rates. At the same time, unemployment has climbed to a 11-year high of 5.4%, underutilisation sits at 13%, and GDP growth was a meagre 0.2% in 2025. This is not a booming economy with too much money chasing too few goods. This is an economy on its knees, still catching its breath.

And yet, some banks are already forecasting OCR hikes. ANZ has tipped three rate rises before the election. Markets are pricing in increases later this year.

Economists Are Pushing Back — Hard

To their credit, not everyone in the financial establishment is nodding along. Kiwibank's chief economist Jarrod Kerr and economist Alexandra Turcu have been unusually blunt. In a recent note, they called rate hikes in the current environment "tone deaf, and potentially reckless," warning that further tightening risks tipping New Zealand into another recession exacerbated by aggressive monetary tightening.

A significant portion of the current inflation pressure appears supply-driven rather than demand-driven. The current price pressures are being driven by global fuel costs (amplified by Middle East tensions), food supply disruptions, and electricity pricing — not by Kiwis suddenly splashing cash around. Raising interest rates to cool spending when spending is already depressed doesn't address the underlying cause. It just makes life harder for mortgage holders, businesses, and anyone trying to stay afloat.

Westpac's senior economist Michael Gordon has similarly flagged a "subdued recovery," noting that firms remain pessimistic about current conditions even as they hope for better times ahead. The picture across the big banks is one of deep caution — not the overheated economy that normally warrants rate hikes.

As Kiwibank put it: "Households and businesses who've already seen their costs rise don't need a rise in interest rates to dampen their demand — because this is not a demand story, this is not Covid."

Raising rates into that environment, they warn, risks repeating the mistakes of the past — and we have form here. In 2022, the RBNZ delivered a historic 75 basis point hike in a single move and simultaneously forecast a recession — an almost surreal moment of institutional self-awareness. We got the recession. Whether we needed both the hike and the recession is a question worth sitting with.

So What Else Could We Do?

This is where it gets interesting — and where a small city-state in Southeast Asia offers a genuinely thought-provoking contrast.

Singapore manages inflation almost entirely through its exchange rate, not its interest rate. The Monetary Authority of Singapore (MAS) manages the Singapore dollar against a basket of trading-partner currencies within a policy band — known as the S$NEER (Singapore Dollar Nominal Effective Exchange Rate). When inflation rises, MAS allows the dollar to appreciate, making imports cheaper and directly reducing cost pressures at the source.

The logic is elegant: because Singapore imports the vast majority of what it consumes, a stronger currency is a direct anti-inflation tool. MAS has three levers — the slope (how fast the dollar appreciates), the width of the band, and its midpoint — and it reviews settings just twice a year, in April and October. Singapore’s framework tends to operate through less frequent but more structurally focused adjustments.

We're Not Singapore — But That's Not the Point

I want to be clear about something. New Zealand is not Singapore. We are not a tiny city-state whose imports exceed three times our GDP. We have a far larger domestic economy, a significant agricultural export sector, and our own distinct inflation dynamics. We cannot simply copy Singapore's exchange rate framework and expect it to work here — and I'm not suggesting we try.

But here's what is worth taking from Singapore's example: the acknowledgement that there are different tools for different types of inflation. Singapore's approach works precisely because its central bank has been honest about what kind of economy it has and designed its policy accordingly. MAS recognised decades ago that for an economy dominated by imported goods, managing import costs directly is more effective than trying to cool domestic demand.

New Zealand's inflation right now has a strong imported and supply-driven component. Food prices are up because of global supply disruptions. Energy prices are up because of geopolitical instability. Council rates are rising because of infrastructure backlogs. None of these are problems that can be solved by making it more expensive for Aucklanders to service their mortgages.

A Broader Conversation We're Not Having

There are other tools available that rarely get discussed in the breathless commentary around OCR decisions. Targeted fiscal policy — direct subsidies, temporary and highly targeted interventions — can address cost pressures without the blunt-force economy-wide impact of a rate hike. Supply-side reforms, particularly in housing and energy, address the actual cause of price pressures rather than punishing people for feeling them.

We also rarely talk seriously about whether the RBNZ's narrow inflation targeting mandate is fit for purpose when inflation is driven primarily by global factors and supply constraints that domestic monetary policy cannot fix. Raising rates in response to a geopolitical fuel shock is a bit like taking paracetamol for a broken leg — it might dull the reading, but it doesn't address the cause.

The Verdict

Inflation at 3.1% is a problem. Nobody is arguing otherwise. But the question of how we respond matters enormously — especially when the patient is already weak. As Kiwibank's economists have warned, hiking rates into a fragile, high-unemployment, low-growth economy risks inducing a recession that causes far more long-term damage than a year or two of slightly elevated inflation.

We don't have to slavishly follow the same playbook every time. Singapore reminds us that thoughtful economies design their monetary tools around their actual circumstances. It's time New Zealand had a more honest conversation about what's actually driving inflation, who bears the cost of our chosen remedy, and whether there are better ways to do this.

The OCR is a tool. It's not the only one.