How the policy actually works

Under the Remit for the Monetary Policy Committee, issued under the Reserve Bank of New Zealand Act 2021, the Reserve Bank must keep annual increases in the Consumers Price Index within a band of 1 to 3 percent on average over the medium term, with a focus on keeping future average inflation near the 2 percent midpoint.

The Reserve Bank does not control prices directly. Instead it adjusts the Official Cash Rate (OCR) - the interest rate it charges banks - to influence how much households and businesses borrow, save and spend, which in turn influences how fast prices rise.

Raising the OCR makes borrowing more expensive and saving more rewarding, which tends to cool spending and slow price rises over roughly 12-24 months. Cutting the OCR does the opposite. Retail interest rates (mortgages, term deposits) move with the OCR because banks fund much of their own lending at rates that track it.

How much of any given inflation reading is caused by monetary policy versus other factors (global supply chains, exchange rates, government spending, one-off shocks) is genuinely disputed among economists, and the lag between an OCR change and its effect on prices makes cause-and-effect hard to prove for any single decision.

New Zealand law (the Land Transport Management Act 2003 and related legislation) sets a fuel excise duty charged on every litre of petrol sold, alongside GST and an Emissions Trading Scheme (ETS) charge. Excise revenue is required to be spent on land transport activities through the National Land Transport Fund.

A fixed number of cents per litre goes to the government and the ETS regardless of the wholesale oil price - so when crude oil is cheap, tax is a bigger share of the pump price; when crude oil is expensive, tax is a smaller share, even though the dollar amount doesn't change.

The pump price is built up from: the imported cost of refined fuel (crude oil price, shipping, exchange rate), excise duty and the ETS charge (fixed cents per litre, set by legislation/regulation), GST (a percentage of the pre-GST price), and the importer/retailer margin (covers distribution, retailing and profit).

Importer margins can vary for reasons that are not fully public (hedging positions, shipping schedules, local competition), so a period of higher margins is not on its own evidence of anticompetitive behaviour - see the Fuel page for how margins compare with their historical average.

Under the Minimum Wage Act 1983, the Government sets a legal minimum hourly rate that must be paid to adult employees, reviewed at least once a year and typically adjusted each 1 April.

Employers cannot legally pay a covered adult employee less than this rate per hour worked, regardless of what the employer and employee might otherwise agree.

Each review weighs several factors, including expected effects on employment, business costs, and low-income households' living standards. There is no fixed formula linking the minimum wage to inflation or average wages - each year's change is a discrete policy decision.

Economists disagree on how minimum wage increases affect employment levels - estimates of the size (or even direction) of any employment effect vary across studies and contexts, and New Zealand-specific evidence is limited. This page does not take a position on that debate.