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Monetary
Policy
Statement
August 2019
i
RESERVE BANK OF NEW ZEALAND/MONETARY POLICY STATEMENT, AUGUST 2019Report and supporting notes published at:
https://www.rbnz.govt.nz/monetary-policy/monetary-policy-statement
Subscribe online: https://www.rbnz.govt.nz/email-updates
Copyright © 2019 Reserve Bank of New Zealand
This report is published pursuant to section 165A of the Reserve Bank of New Zealand Act
1989.
ISSN 1770-4829
ii
RESERVE BANK OF NEW ZEALAND/MONETARY POLICY STATEMENT, AUGUST 2019Monetary Policy Statement
August 2019
Projections and data finalised on 1 August 2019.
Policy assessment and summary record of meeting finalised on 7 August 2019.
Contents
The Remit for the Monetary Policy Committee 2 5. Appendices 36
1. Policy assessment 4 1. Our recent research 37
Summary record of meeting 5 2. MSE indicators 41
2. Key policy judgements 7 3. Chart pack 42
Box A: Statement of the MPC’s monetary policy strategy 14 4 Statistical tables 46
3. Special topics 17
4. Economic projections 26
1
RESERVE BANK OF NEW ZEALAND/MONETARY POLICY STATEMENT, AUGUST 2019The remit for the Monetary Policy Committee
Reserve Bank of New Zealand
The Government’s Economic Objective 1) Monetary Policy Objectives
The Government’s economic objective is to improve the wellbeing and a) Under Section 8 of the Act the Reserve Bank, acting through the
living standards of New Zealanders through a sustainable, productive MPC, is required to formulate monetary policy with the goals of
and inclusive economy. Our priority is to move towards a low carbon maintaining a stable general level of prices over the medium term
economy, with a strong diversified export base, that delivers decent jobs and supporting maximum sustainable employment.
with higher wages and reduces inequality and poverty.
2) Operational Objectives
Context
a) For the purpose of this remit the MPC’s operational objectives shall
Monetary policy plays an important role in supporting the Government’s be to:
economic objective. The Reserve Bank of New Zealand Act 1989
(the Act) requires that monetary policy promote the prosperity and i. keep future annual inflation between 1 and 3 percent over the
wellbeing of New Zealanders, and contribute to a sustainable and medium term, with a focus on keeping future inflation near
productive economy. Monetary policy contributes to public welfare by the 2 percent mid-point. This target will be defined in terms
reducing cyclical variations in employment and economic activity whilst of the All Groups Consumers Price Index, as published by
maintaining price stability over the medium term. Statistics New Zealand; and
This remit is issued by the Minister of Finance to the Monetary Policy ii. support maximum sustainable employment. The MPC should
Committee (MPC) under Clause 3, Schedule 1 of the Act. consider a broad range of labour market indicators to form
a view of where employment is relative to its maximum
2
RESERVE BANK OF NEW ZEALAND/MONETARY POLICY STATEMENT, AUGUST 2019sustainable level, taking into account that the level of
maximum sustainable employment is largely determined by
non-monetary factors that affect the structure and dynamics
of the labour market and is not directly measurable.
b) In pursuing the operational objectives, the MPC shall:
i. have regard to the efficiency and soundness of the financial
system;
ii. seek to avoid unnecessary instability in output, interest rates,
and the exchange rate; and
iii. discount events that have only transitory effects on inflation,
setting policy with a medium-term orientation.
3
RESERVE BANK OF NEW ZEALAND/MONETARY POLICY STATEMENT, AUGUST 2019Chapter 1
Policy assessment
Tēnā koutou katoa, welcome all. In New Zealand, low interest rates and increased government spending
will support a pick-up in demand over the coming year. Business
The Official Cash Rate (OCR) is reduced to 1.0 percent. The Monetary investment is expected to rise given low interest rates and some ongoing
Policy Committee agreed that a lower OCR is necessary to continue to capacity constraints. Increased construction activity also contributes to
meet its employment and inflation objectives. the pick-up in demand.
Employment is around its maximum sustainable level, while inflation Our actions today demonstrate our ongoing commitment to ensure
remains within our target range but below the 2 percent mid-point. inflation increases to the mid-point of the target range, and employment
Recent data recording improved employment and wage growth is remains around its maximum sustainable level.
welcome.
Meitaki, thanks.
GDP growth has slowed over the past year and growth headwinds are
rising. In the absence of additional monetary stimulus, employment and Adrian Orr
inflation would likely ease relative to our targets.
Global economic activity continues to weaken, easing demand for New
Zealand’s goods and services. Heightened uncertainty and declining
international trade have contributed to lower trading-partner growth.
Central banks are easing monetary policy to support their economies. Governor
Global long-term interest rates have declined to historically low levels,
consistent with low expected inflation and growth rates into the future.
4
RESERVE BANK OF NEW ZEALAND/MONETARY POLICY STATEMENT, AUGUST 2019Summary record of meeting appropriate policy responses should imported inflation persist at low
levels.
The Committee welcomed the recent employment and wage data but
The Monetary Policy Committee agreed there was a need for further noted that private sector wage growth was subdued despite businesses
monetary stimulus to meet its inflation and employment objectives. having difficulty finding labour. The members discussed that the recent
slowdown in growth could dampen wage inflation by more than assumed.
The Committee noted recent economic developments were broadly Some noted that if cost pressures remain elevated, firms may pass on
as expected and employment was around the targeted maximum costs to consumer prices by more than assumed, while others viewed
sustainable level. The Committee was pleased to see that the labour the wage pass through as a natural consequence of a tight labour market
market data held up relative to expectations in the June 2019 quarter. and policy stimulus.
However, the Committee noted that inflation remains below 2 percent The members discussed the recent slower domestic GDP growth and
and the outlook for employment and inflation was softer. GDP growth had the impact of slowing global demand on New Zealand through the trade,
slowed and global conditions had weakened. financial and confidence channels. The members noted that heightened
global uncertainty was reducing investment and suppressing trading-
The Committee agreed that the balance of risks to achieving its partner growth. This highlighted the risk of a larger or more prolonged
consumer price inflation and maximum sustainable employment slowdown in global economic growth.
objectives was tilted to the downside, although members placed different
emphasis on the sensitivities to these risks. The Committee noted that additional stimulus from central banks had
underpinned growth and reduced the likelihood of a more-pronounced
The Committee noted the decline in long-term government bond yields slowdown. However, some thought that even with support from monetary
to historically low levels. Financial market participants expect both stimulus, considerable economic and policy uncertainty could see global
inflation and policy interest rates to remain low globally for a prolonged growth continue to decline. Other members noted that the easing in
period. Some members noted that survey measures of short-term global financial conditions since the beginning of the year, or a shift in
inflation expectations in New Zealand had declined recently. Others were political environment, could lead to a pick-up in global growth over the
encouraged that longer-term expectations remained anchored at close to next year.
2 percent.
The Committee acknowledged the importance of additional spending
The Committee agreed that weak global economic conditions could from households, businesses, and the government, to meet their inflation
see imported inflation remain low if global growth slows further or and employment targets. They also agreed that additional monetary
if commodity prices decline. The members discussed the range of
5
RESERVE BANK OF NEW ZEALAND/MONETARY POLICY STATEMENT, AUGUST 2019stimulus was needed. The members discussed several important decline and this was consistent with generally lower interest rates over
uncertainties. time. Members also noted the Bank’s current assessment of analysis
on the transmission from monetary policy to growth and inflation. This
The Committee noted that low business confidence had dampened suggested that the overall strength of these relationships was little
business investment in 2018 and had remained weak in mid-2019. The changed in the environment of low interest rates. The Committee agreed
members discussed that if sentiment remained low, perhaps due to to continue to monitor and assess the impacts of monetary policy,
global economic conditions or if profitability remains squeezed, growth including the transmission through to retail interest rates.
might not increase as anticipated over the medium term. The members
also noted that the shift in domestic production from manufacturing The Committee reached a consensus that, relative to the May Statement,
towards services was also dampening business investment. a lower path for the OCR over the projection period was appropriate. The
lower OCR path reflected the economic projections and the balance of
The outlook for household spending was discussed with regard to the risks discussed.
assumed dampening impact of soft house price inflation. Some members
noted lower mortgage rates could contribute to a stronger pick-up in The members debated the relative benefits of reducing the OCR by 25
house price inflation, which could support consumption. Other members basis points and communicating an easing bias, versus reducing the
noted that house price inflation could remain weak, for example if net OCR by 50 basis points now. The Committee noted both options were
immigration continued to decline relative to the number of new houses consistent with the forward path in the projections. The Committee
being constructed. reached a consensus to cut the OCR by 50 basis points to 1.0 percent.
They agreed that the larger initial monetary stimulus would best ensure
The Committee noted that fiscal assumptions embedded in the the Committee continues to meet its inflation and employment objectives.
projections were consistent with Budget 2019, which included
adjustments to reflect that government spending takes time to increase. Attendees
The members discussed that fiscal policy could be more supportive if
future announcements incorporate more spending or if the impact on Reserve Bank staff: Adrian Orr, Geoff Bascand, Christian Hawkesby,
domestic demand is larger than assumed. This view was balanced by Yuong Ha
the impact of any increase in government spending being delayed,
for example due to timing of the implementation of new initiatives and External: Bob Buckle, Peter Harris, Caroline Saunders
difficulty finding labour.
Observer: Bryan Chapple
The Committee also discussed the contribution of monetary policy
to the projected pick-up in growth and inflation. The members noted Secretary: Chris McDonald
that estimates of the neutral level of interest rates have continued to
6
RESERVE BANK OF NEW ZEALAND/MONETARY POLICY STATEMENT, AUGUST 2019Chapter 2
Key policy judgements
• Economic growth has slowed over the past year and is likely to Additional monetary stimulus is needed to achieve our
remain soft in the near term. Subdued house price inflation and low objectives
business confidence are suppressing domestic demand.
Slower GDP growth over the past year is expected to reduce capacity
• Global economic conditions continue to weaken. Declining trade pressure and reduce employment relative to its maximum sustainable
and heightened uncertainty have contributed to lower trading- level in the near term. Inflation is likely to remain below the 2 percent
partner growth. Central banks are easing monetary policy to target mid-point throughout 2019 and into 2020. Without additional
support their economies. stimulus, inflation and employment are likely to be below their targets
over the medium term. As a result, a lower OCR is necessary to achieve
• Employment is currently near its maximum sustainable level our objectives (figure 2.1).
and underlying inflation has risen moderately over recent years.
However, with inflation still below 2 percent and domestic growth Low inflation persists, despite capacity pressure
slowing, additional monetary stimulus is required to achieve our
employment and inflation objectives in the medium term. A key judgement affecting monetary policy is how persistent we think low
inflation will be.
• Monetary and fiscal stimulus is expected to give impetus to growth
from later this year. Prior to mid-2018, low interest rates and supportive global conditions
contributed to an upswing in the economy and there were signs of
increasing capacity pressure, including in the labour market. Employment
increased to near its maximum sustainable level and has remained
around this level since, although the range of estimates is wide (see table
5.1).
7
RESERVE BANK OF NEW ZEALAND/MONETARY POLICY STATEMENT, AUGUST 2019Figure 2.1 Despite this earlier improvement in economic conditions, annual CPI
Official Cash Rate inflation and most measures of core inflation remain below 2 percent
(quarterly average) (figure 2.2). Subdued CPI inflation partly reflects low imported inflation,
% % which has held down tradables inflation since 2012. Tradables inflation
9 9
8
Projection
8
is expected to decline in the near term before gradually rising to slightly
7 7
below its long-term average.
6 6
5 5
Weak pricing behaviour has also dampened inflation. Although survey
4 4
measures suggest inflation expectations remain anchored at around 2
3
Aug May
3
percent, firms and households continue to reflect past low inflation in
MPS MPS
2 2 their pricing decisions. Globally, financial market participants expect both
1 1 inflation and policy interest rates to remain low for a prolonged period.
0 0 Long-term government bond yields are currently at historically low levels
2002 2005 2008 2011 2014 2017 2020
(figure 2.3).
Source: RBNZ estimates.
Figure 2.3
Figure 2.2 10-year government bond yields
Headline and core inflation
(annual) % %
7 7
% %
6 6 6 6
Headline inflation
5 5 5 5
Australia New Zealand
4 4
Sectoral
4 factor 4
model 3 3
3 3 2 2
Trimmed Weighted
mean (30%) median
1 United States 1
2 2 Japan
0 0
1 1 Germany
Ex-food Factor -1 -1
and energy model 2010 2012 2014 2016 2018
0 0
2002 2005 2008 2011 2014 2017 Source: Bloomberg.
Source: Stats NZ, RBNZ estimates.
Note: Core inflation measures exclude the effect of GST.
8
RESERVE BANK OF NEW ZEALAND/MONETARY POLICY STATEMENT, AUGUST 2019Nominal wage inflation, which is closely related to underlying inflationary Figure 2.4
pressure, is lower than we would expect given tightness in the labour GDP growth
market. Our analysis suggests that persistent low nominal wage inflation (annual)
partly reflects previously low CPI inflation. Low imported inflation has % %
8 8
contributed to low CPI inflation, particularly between 2012 and 2016. This
has supported real wage inflation (see chapter 3). 6 6
GDP
4 growth 4
Low wage inflation may also reflect long-term labour market trends. For
Potential
example, it could relate to technological improvements or increasing 2
GDP growth
2
labour market flexibility. These explanations suggest nominal wage 0 0
inflation will remain subdued relative to tightness in the labour market.
-2 -2
GDP growth has slowed -4 -4
2002 2005 2008 2011 2014 2017
Source: Stats NZ, RBNZ estimates.
When setting monetary policy over recent years, our objective has been
to stimulate GDP growth, build capacity pressure, and lift inflation to the 2
percent target mid-point. However, GDP growth has slowed over the past Figure 2.5
year. Annual GDP growth was 2.5 percent in the March 2019 quarter. Trading-partner GDP growth
This is below our estimate of potential growth in the New Zealand (annual)
economy (figure 2.4). In addition, indicators of growth have remained 6
% %
6
weak or weakened further over the past few months. 5 5
4 4
Weakening global conditions are contributing to the 3 3
domestic slowdown 2 2
1 1
Global economic conditions have weakened since mid-2018. Growth has 0 0
slowed in some of our key trading-partner economies, especially China, -1 -1
Australia, and Europe (figure 2.5). Political and policy uncertainty is very -2 -2
elevated in several major economies. International trade has declined -3 -3
2002 2005 2008 2011 2014 2017
and growth in manufacturing production has slowed, while service sector
Source: Haver Analytics, Stats NZ, RBNZ estimates.
activity has largely held up. Spillovers from trade disputes have resulted
in widespread impacts across many economies.
9
RESERVE BANK OF NEW ZEALAND/MONETARY POLICY STATEMENT, AUGUST 2019Figure 2.6 Prices for many commodities have softened, although reduced supply
Trading-partner policy rates has provided support for some. New Zealand’s terms of trade declined
over 2018, weighing on domestic incomes and dampening growth in
5
% %
5
consumption and business investment. The terms of trade are expected
to increase over the coming quarters, providing a boost to domestic
4 4 spending. However, this increase partly reflects lower import prices,
which put downward pressure on inflation.
3 Australia 3
A number of central banks have responded to the weakening economic
2 2
outlook and low expected inflation by easing monetary policy. Financial
1 1
market pricing indicates that market participants now expect policy
United States
settings to be much easier in the future than they expected late last year
0 0 (figure 2.6). Long-term interest rates have fallen and financial conditions
2011 2013 2015 2017 2019
Source: Bloomberg. have eased. The New Zealand dollar Trade-Weighted Index (TWI) has
Note: Dotted lines are policy rate expectations implied by market pricing as at November 2018. Dashed been fairly stable since the start of 2018 as upward pressure from lower
lines are current expectations.
global interest rates has been offset by lower domestic interest rates and
export prices.
Figure 2.7
House price inflation House price inflation and business confidence are weak
(quarterly, s.a.)
8
% %
8
Domestically, the housing market has softened over recent months,
dampening the outlook for household spending (figure 2.7). House prices
6 6
have declined in Auckland and increased more slowly in other regions.
4 4 We expect this to dampen consumer demand, as changes in housing
2 2 wealth affect spending decisions. Construction activity is expected to
0 0
remain elevated, given the still high level of house prices and continued
strong population growth. However, further falls in house prices could
-2 -2
reduce construction activity.
-4 -4
-6 -6 Deteriorating business sentiment also appears to have adversely
2002 2005 2008 2011 2014 2017
affected economic activity, and likely contributed to the decline in
Source: REINZ, RBNZ estimates.
business investment over 2018. Survey measures suggest business
10
RESERVE BANK OF NEW ZEALAND/MONETARY POLICY STATEMENT, AUGUST 2019confidence in the economic outlook has continued to decline in 2019. Figure 2.8
There are likely to be a number of factors causing this decline in Unemployment rate
confidence, including concerns about the global economy, domestic (s.a.)
policy uncertainty, slowing domestic growth, and declining profit margins. %
7.0
%
7.0
Projection
6.5 6.5
Monetary and fiscal stimulus supports growth from late
6.0 6.0
2019
5.5 5.5
5.0 5.0
With GDP growth and capacity pressure expected to be weaker in the
near term, a material pick-up in GDP growth is necessary for inflation to 4.5 4.5
increase to 2 percent and for employment to remain around its maximum 4.0 4.0
sustainable level. More stimulatory monetary policy is needed to support 3.5 3.5
this pick-up. 3.0 3.0
2002 2005 2008 2011 2014 2017 2020
Source: Stats NZ, RBNZ estimates.
Monetary stimulus is expected to give impetus to growth from late 2019.
Market interest rates have declined since the start of 2019. This supports
consumption and investment, and keeps the New Zealand dollar Growth pick-up supports employment and inflation
exchange rate lower.
As increased monetary and fiscal stimulus lifts GDP growth above
Fiscal policy is also expected to support growth. In particular, government potential, the labour market is expected to tighten and the unemployment
consumption growth is projected to increase sharply from the second half rate to decrease (figure 2.8). We expect employment to remain around its
of 2019. maximum sustainable level over the projection period.
11
RESERVE BANK OF NEW ZEALAND/MONETARY POLICY STATEMENT, AUGUST 2019Figure 2.9 Key assumptions and uncertainties
CPI inflation
(annual)
The outlook for monetary policy is contingent on the key forecast
%
6
%
6
assumptions outlined in table 2.1. There is considerable uncertainty
Projection
around these assumptions, and they are updated as new information
5 5
becomes available. The Summary Record of Meeting outlines the key
4 4 uncertainties discussed by the Monetary Policy Committee that could
affect the economy and shift the outlook for monetary policy.
3 3
2 2
1 1
0 0
2002 2005 2008 2011 2014 2017 2020
Source: Stats NZ, RBNZ estimates.
Weaker capacity pressure is expected to flow through into lower
non-tradables inflation over the rest of 2019. However, non-tradables
inflation is expected to rise from 2020 as capacity pressure begins to
build and pricing behaviour becomes less subdued. CPI inflation is
projected to return to 2 percent in 2021 (figure 2.9). Recent and planned
minimum wage increases are expected to have relatively small effects on
consumer price inflation as firms absorb most of the additional cost into
their margins.
12
RESERVE BANK OF NEW ZEALAND/MONETARY POLICY STATEMENT, AUGUST 2019Table 2.1
Key forecast assumptions
Overarching narrative Key forecast assumptions
Global growth stabilises GDP growth in our major trading partners averages 3.3 percent over the projection period. Monetary stimulus is assumed to
around its historical support growth.
average
Central banks continue to ease monetary policy. The New Zealand dollar TWI remains around 73 over the projection period.
Global inflationary pressure Inflationary pressure in our major trading partners is weak over 2019, and edges up only gradually over the projection period.
edges up only gradually Import price inflation in foreign currency terms is low, averaging close to zero over the projection period.
Dubai oil prices gradually decline to around USD 60 per barrel.
Whole milk powder prices remain stable around USD 3,000 per metric tonne.
New Zealand GDP growth GDP growth remains soft over the middle of 2019, but later exceeds potential growth as fiscal and monetary stimulus increases.
picks up to above trend due Annual net immigration of working-age people falls from 40,000 in 2018 to 28,000 in 2021, providing less support to growth over
to fiscal and monetary stim- time.
ulus
Household consumption growth slows as house price inflation remains low and net immigration declines.
Growth in export volumes slows over 2019. Import volumes grow at a moderate pace, supported by a pick-up in domestic
demand growth from late 2019.
Government spending growth increases significantly over the next year, but eases over the medium term.
Capacity pressure builds as Employment is currently near its maximum sustainable level and the output gap is close to zero.
demand growth outstrips Labour force participation remains around its current level.
supply
The labour market softens slightly over 2019. Over the medium term, the unemployment rate declines to around 4 percent and
the output gap rises slightly above zero.
Inflation trends up to the 2 Annual non-tradables inflation dips over 2019 but then increases gradually, as capacity pressure increases and the dampening
percent target mid-point effect of past low inflation slowly fades.
Annual tradables inflation is zero over 2019, but recovers thereafter to just below-average levels.
Annual wage inflation rises to around 2.5 percent in 2021, as the labour market tightens and the minimum wage rises. Minimum
wage increases are mostly absorbed in firms’ margins and have a small impact on CPI inflation.
13
RESERVE BANK OF NEW ZEALAND/MONETARY POLICY STATEMENT, AUGUST 2019Box A are set out in the Remit. The current Remit sets out a flexible inflation
targeting regime, under which the MPC must set policy to:
Statement of the MPC’s monetary policy strategy
• keep future annual inflation between 1 and 3 percent over the
The following statement summarises the MPC’s monetary policy strategy. medium term, with a focus on keeping future inflation near the 2
The strategy outlines the overarching plan for achieving the objectives percent mid-point; and
laid out in the Remit, summarising the key principles the MPC considers
when setting monetary policy. We intend to include this in each Monetary • support maximum sustainable employment, considering a broad
Policy Statement and to update it as the MPC’s strategy evolves. range of labour market indicators, and taking into account that
maximum sustainable employment is largely determined by
The MPC’s monetary policy strategy non-monetary factors.
The MPC’s monetary policy strategy is its overarching plan for how it In pursuing these objectives, the Remit requires the MPC to have regard
will formulate monetary policy under different circumstances to achieve to the efficiency and soundness of the financial system, seek to avoid
its objectives.1 It outlines a consistent approach for how the MPC unnecessary instability in the economy and financial markets, and
intends to achieve its objectives across time, accounting for trade- discount events that have only transitory effects on inflation.
offs and uncertainty. Agreeing on and publishing a strategy promotes
transparency, public understanding, and accountability. The Reserve Bank’s flexible inflation targeting framework and the MPC’s
monetary policy strategy reflect that:
Monetary policy framework and objectives
• low and stable inflation is monetary policy’s best long-run
Under the Reserve Bank of New Zealand Act 1989 (the Act), the MPC contribution to the well-being of New Zealanders;
is responsible for formulating monetary policy to maintain a stable
general level of prices over the medium term and to support maximum • in the short to medium term, monetary policy can influence real
sustainable employment.2 Operational objectives for monetary policy variables such as employment, and hence policy trade-offs can
arise; and
• monetary policy is more effective if the Bank’s policy targets are
1 For more in-depth discussion of monetary policy strategy in New Zealand, see J. Ratcliffe and R. Kendall
(2019), ‘Monetary policy strategy in New Zealand’, Reserve Bank of New Zealand, Bulletin, Vol. 82, No.
credible, so policy should be formulated in a way that ensures
3, April. credibility is maintained.
2 These economic objectives contribute to the overall purpose of the Act, which is to promote the
prosperity and well-being of New Zealanders, and contribute to a sustainable and productive economy.
See https://www.rbnz.govt.nz/monetary-policy/about-monetary-policy/monetary-policy-framework for
more information on New Zealand’s monetary policy framework, including the full text of the Remit.
14
RESERVE BANK OF NEW ZEALAND/MONETARY POLICY STATEMENT, AUGUST 2019Key aspects of monetary policy strategy The MPC responds to both deviations above target and deviations
below target. The MPC sets policy to stabilise employment near its
The MPC practises forecast targeting, which means that it sets maximum sustainable level, and to return inflation to the 2 percent
monetary policy such that it expects to achieve its inflation and target mid-point, regardless of whether inflation is currently below or
employment goals in the medium term. In most instances, the MPC above target. This approach helps to anchor inflation expectations at the
aims to return inflation to the target mid-point within a one to three year target mid-point and promotes sustainable growth and employment by
horizon. The appropriate horizon at each policy decision will vary based dampening fluctuations in the business cycle.
on how different policy paths will contribute to maximum sustainable
employment, whether price-setters’ expectations are consistent with the The MPC considers the balance of risks to its objectives that arise
inflation target, and other considerations such as the balance of risks to from uncertainty about the economic outlook and the transmission of
the MPC’s central economic outlook. its policy decisions. In general, the MPC will incorporate likely future
developments into its central economic projections and set monetary
The MPC does not attempt to immediately return inflation and policy in response. However, the MPC will also take into account risks to
employment to target, because monetary policy actions take time to its central projections when setting policy.
transmit through the economy. Attempting to return inflation to target
too quickly would result in unnecessary instability in the economy and The MPC has regard to the efficiency and soundness of the financial
financial markets. The 1 to 3 percent target range for inflation provides system, while recognising that in most instances prudential policy is
the MPC with flexibility to ensure that managing inflation variability does better suited to leaning against risks to financial stability. Monetary policy
not come at the cost of excessive variability in the real economy. For and prudential policy are coordinated to ensure that changes in each
similar reasons, the MPC does not attempt to offset events that have only policy are taken into account when setting the other.
transitory effects on inflation.
The MPC takes into account both its inflation and employment
objectives when setting policy. In the long run, no trade-off exists
between the MPC’s objectives. In the short to medium term, there may
be situations where monetary policy can move one objective closer to
target only at the cost of the other, resulting in a trade-off. When a
trade-off does arise, the MPC will consider outcomes for both objectives
in setting policy. In general, if employment is projected to be below its
long-run sustainable level, the MPC would let inflation overshoot the
target mid-point for a time, and vice versa.
15
RESERVE BANK OF NEW ZEALAND/MONETARY POLICY STATEMENT, AUGUST 2019Implementation of strategy
The MPC applies the following process when formulating a policy
decision:
1) Firstly, it considers the outlook for the economy and its policy
objectives. It then discusses risks to achieving its policy objectives.
2) Next, it deliberates about which stance of monetary policy is most
consistent with its monetary policy strategy given the current
economic outlook, risks, and trade-offs.
3) Finally, the MPC decides how it will achieve the desired stance of
monetary policy, including whether or not to change the OCR at the
current meeting and how it will communicate the policy outlook.
16
RESERVE BANK OF NEW ZEALAND/MONETARY POLICY STATEMENT, AUGUST 2019Chapter 3
Special topics
Prior to each Statement, the MPC is provided with analysis of some 1. How are weaker global conditions
topical issues that may influence the policy assessment.
affecting New Zealand’s economy?
Topics for the August Statement included:
1. How are weaker global conditions affecting New Zealand’s
economy? New Zealand is a small open economy, so global economic and financial
market conditions have a large influence on our business cycle (figure
2. What is driving low business investment? 3.1). Over the past year, the global economy has moved from a phase of
relative strength to one of relative weakness. We have reflected this shift
3. Why has house price inflation been so weak? in our forecasts for the domestic economy and our policy stance.
4. Has low CPI inflation driven low nominal wage growth? Although global conditions have weakened, most external forecasts are
for the global economy to grow at around its historical average over the
5. Has recent monetary policy easing passed through to bank lending next few years. However, our domestic forecasts do not place much
rates? weight directly on forecasts of growth in our trading partners. We instead
consider the various channels through which international developments
affect New Zealand’s economy and adjust our forecasts accordingly.
17
RESERVE BANK OF NEW ZEALAND/MONETARY POLICY STATEMENT, AUGUST 2019At a high level, the key channels are trade, financial markets, and Figure 3.1
confidence/uncertainty (figure 3.2).1 GDP growth
(annual)
Trade channel % %
8 8
Weaker global conditions often lead to lower prices for our exports and 6
Trading partners
6
imports, and reduced tourist spending in New Zealand.
4 4
Currently, slowing growth in global demand is suppressing the outlook for 2 New Zealand 2
import and export prices, despite idiosyncratic factors supporting prices
0 0
for some of our export products. Lower export prices reduce domestic
incomes and spending. Low import price inflation is expected to hold -2 -2
down tradables inflation, which in turn dampens pricing behaviour and -4 -4
suppresses non-tradables inflation too. 2002 2005 2008 2011 2014 2017
Source: Haver Analytics, Stats NZ, RBNZ estimates.
We also forecast growth in exports of services to soften over 2019,
as weaker global conditions reduce tourist spending. Growth in visitor Figure 3.2
arrivals has slowed over recent quarters, although capacity constraints in Transmission channels of international shocks to New Zealand
the tourism sector may have also limited further growth.
Transmission Channels New Zealand Impact
Financial market channel Trade channel
Exports, imports,
terms of trade
International NZ real economic
New Zealand’s financial markets are integrated into the global financial shock
Financial market
channel
Interest rates /
exchange rate activity and inflation
system. As a result, weak global conditions can transmit to New Zealand
Business and consumer
via our financial markets. Uncertainty channel
confidence
Globally, policy interest rates are expected to fall over the coming year,
as central banks respond to the weaker outlook for demand and inflation.
This would typically place upward pressure on the New Zealand dollar,
1 For a discussion of the impacts of global shocks on the New Zealand economy, see M. Callaghan,
Cassino, E., Vehbi, T., and Wong, B. (2019), ‘Opening the toolbox: how does the Reserve Bank analyse
the world?’, Reserve Bank of New Zealand Bulletin, Vol.82, No.4, April.
18
RESERVE BANK OF NEW ZEALAND/MONETARY POLICY STATEMENT, AUGUST 2019as returns on New Zealand dollar investments become relatively more 2. What is driving low business
attractive. However, expectations for lower New Zealand interest rates
have dampened this effect. investment?
In the past, changes in the cost of New Zealand banks’ offshore
borrowing have been an important influence on the New Zealand
economy, due to their effects on domestic lending rates. These funding Investment is an important factor supporting GDP growth in our
costs tend to increase at times of heightened uncertainty and risk projections. However, for several years business investment has been
aversion in global financial markets. relatively low, with government and residential investment supporting
investment overall (figure 3.3). This section investigates the drivers of low
Domestic long-term interest rates have moved lower as global long-term business investment.
interest rates have fallen. The spread between banks’ offshore funding
costs and benchmark interest rates has been broadly steady over the Figure 3.3
past few years, despite weaker global conditions. Investment
(share of nominal GDP, s.a.)
Confidence/uncertainty channel 30
% %
30
Total
25 25
Global developments can also affect domestic confidence and
Government
uncertainty; however, this channel is difficult to measure. Slower world 20 20
growth has dampened business investment by lowering export prices Residential
15 15
and the output gap. But business investment has been weaker than
would be suggested by these factors alone. 10 10
5 Business 5
Recent low business confidence, which may reflect global uncertainty,
likely explains some of this additional weakness. We reflect this in our 0
1992 1996 2000 2004 2008 2012 2016
0
forecasts by projecting investment to respond sluggishly to the projected Source: Stats NZ, RBNZ estimates.
increase in the output gap over the forecast horizon.
Business investment has been weaker than capacity pressure in the
economy would suggest. A higher output gap is typically associated with
higher investment because it indicates that demand is higher relative
to firms’ capacity to produce. As a result, firms may invest more to take
19
RESERVE BANK OF NEW ZEALAND/MONETARY POLICY STATEMENT, AUGUST 2019Figure 3.4 Weaker GDP growth since 2016 offers another explanation. With slower
Core business investment and the output gap GDP growth, firms may expect demand for their products to grow more
(share of potential)
% % slowly in the future, and therefore be less willing to invest, even if there is
5 12
a high degree of capacity pressure in the economy.
4
11
3 Core business
Output gap investment
2 (RHS) 10 Structural changes in the economy have also played a role. Since the
1 mid-1990s, the composition of the economy has shifted away from
0 9
manufacturing and towards services production (figure 3.5). Services
-1 8
-2 production is generally less capital intensive than manufacturing, so this
-3 7 transition has contributed to a decline in investment in plant, machinery,
-4 and equipment as a share of the economy.
6
-5
-6 5
1992 1996 2000 2004 2008 2012 2016 We expect business investment to increase over the projection period
Source: Stats NZ, RBNZ estimates. as capacity pressure builds. However, this increase may be tempered
Note: Core business investment is total business investment minus investment
in intangible assets, data processing equipment, and the chain-linked residual.
by structural shifts and elevated global uncertainty. Total investment is
expected to be supported by strong construction activity.
advantage of demand. But despite capacity pressure in the economy, Figure 3.5
business investment has been subdued (figure 3.4). Changes in industry shares of production
(change since 1992)
Elevated global uncertainty may help explain this. When firms are % pts
6
% pts
6
uncertain about the future, they are typically more cautious about making Services
4 4
significant investments. Global uncertainty is likely to be one driver of
recent low business confidence, although domestic factors have played 2 Construction 2
a role too. Combined, these factors have likely suppressed business
0 0
investment in New Zealand.2 Primary industries
-2 -2
-4 Manufacturing
-4
-6 -6
2 See Kamber, G., O. Karagedikli, M. Ryan, and T. Vehbi, (2016), ‘International spill-overs of uncertainty 1992 1996 2000 2004 2008 2012 2016
shocks: Evidence from a FAVAR’, CAMA Working Paper Series, 61/2016 and Rice, A., T. Vehbi, and
B. Wong, (2018), ‘Measuring uncertainty and its impact on New Zealand’, RBNZ Analytical Note, Source: Stats NZ, RBNZ estimates.
AN2018/01.
20
RESERVE BANK OF NEW ZEALAND/MONETARY POLICY STATEMENT, AUGUST 20193. Why has house price inflation been so Figure 3.6
Estimated impact of mortgage rate changes on house price inflation
weak? (quarterly)
% pts % pts
2.0 2.0
1.5 1.5
House prices are a key driver of household spending. Recently, house
1.0 1.0
price inflation has been weak, influencing our forecasts for household
consumption and residential investment (see chapter 4). 0.5 0.5
0.0 0.0
House price inflation has been low despite falling mortgage interest rates -0.5 -0.5
in 2018 and early 2019 (see figure 4.8). Lower interest rates tend to
-1.0 -1.0
support house prices by reducing the cost of financing home ownership.
Because houses are long-term assets, longer-term mortgage rates, -1.5
2014 2015 2016 2017 2018 2019 2020
-1.5
which have fallen the most, correlate best with house price movements. Source: RBNZ estimates.
Note: Bars indicate the contribution of changes in the five-year mortgage rate up until the
June 2019 quarter.
Historically, falls in the five-year mortgage rate have been associated
with stronger house price inflation over the subsequent year or two. We
estimate that recent falls in interest rates supported house prices in the House price inflation appears to have slowed more in regions that had
first half of 2019, but will have more impact in late 2019 and early 2020 greater non-resident buyer activity, like Auckland and Queenstown, but
(figure 3.6). the role of the restrictions in this is unclear (figure 3.7). Moreover, house
price inflation in regions that had low non-resident participation also
Given house price inflation was actually weak in early 2019, other factors slowed in the June quarter 2019. Having been in place for nine months,
must have had a dampening impact (see figure 2.7). the transitional impact of the restrictions may have largely run its course.
Tighter restrictions on non-resident purchases of residential property are Slowing net immigration and strong house building may also be
likely to have suppressed house price inflation. However, ‘now or never’ dampening house prices. Building does not appear to be outpacing
purchases could have supported prices between the announcement and population growth, consistent with recent elevated nationwide rent
the final implementation of the restrictions in October 2018. growth. However, current house prices should also be influenced by
expectations of future demand and supply. Lower net immigration and
strong building could be dampening expectations of future supply and
demand pressures, weighing on current house prices.
21
RESERVE BANK OF NEW ZEALAND/MONETARY POLICY STATEMENT, AUGUST 2019Figure 3.7 Overall, we think lower mortgage rates, the diminishing impact of the
Regional house price inflation foreign buyer ban, and the ruling out of the capital gains tax will outweigh
(quarterly, s.a.)
strong building and declining net immigration, supporting prices through
% % the rest of 2019. This is consistent with a recent pick-up in the number of
12 12
house sales, which tends to lead prices by up to three months.
10 10
Queenstown
8 8
Over the medium term, house price inflation is expected to remain
Rest of NZ
6
(few overseas
6
relatively low as the support from lower mortgage rates fades (see
buyers)
4 4 chapter 4). The subdued trend for house price inflation weighs on
2
Auckland
2 consumption and residential investment over the projection period.
0 0
Rest of NZ
-2 -2
-4
(overseas buyers active)
2016 2017 2018
-4
4. Has low CPI inflation driven low
Source: REINZ, RBNZ estimates.
Note: Regions in the rest of New Zealand where overseas buyers made up more
nominal wage growth?
than 1 percent of house transfers have been grouped as ‘Rest of NZ (overseas
buyers active)’. All other regions have been grouped as ‘Rest of NZ (few overseas
buyers)’. The shaded area indicates the period between when the current
Government was formed and when the overseas buyer restrictions came into force.
Nominal wage inflation has been subdued since the global financial crisis
(GFC), despite a steady economic recovery, a tightening labour market,
Other factors will have also influenced the housing market. Government and employment currently estimated to be near its maximum sustainable
policies regarding rental properties may have contributed to subdued level. This section investigates the importance of CPI inflation for nominal
demand from property investors. Given that many of these policies were wage inflation.3
signalled some time ago, their impacts on prices may have already
occurred. That said, the Government’s decision to not adopt a capital Our analysis finds that low past actual and expected CPI inflation has
gains tax may provide a temporary boost to house price inflation in contributed significantly to low nominal wage inflation since the GFC.
the second half of 2019, but we expect its impact on price growth will
diminish after that.
Other potential influences on house prices include housing affordability
3 In this section we focus on the private sector Labour Cost Index, which measures the cost of labour for
constraints, which may have restrained house prices, and the easing of firms. It is adjusted for changes in productivity and is not affected by changes in the composition of jobs
in the economy. It is not a measure of the pay received by workers, which has grown at a faster rate than
loan-to-value restrictions, which may have supported house price growth. the cost of labour to firms.
22
RESERVE BANK OF NEW ZEALAND/MONETARY POLICY STATEMENT, AUGUST 2019Figure 3.8 Figure 3.9
Estimated drivers of wage inflation Real and nominal wage inflation
(annual) (annual)
% % pts % %
4.0 2.0 4 4
Wage inflation 1.5 3 3
3.5 Nominal wage
inflation
2 2
3.0 1.0
Model-predicted 1 1
wage inflation 0.47%
2.5 CPI expectations 0.5
(RHS) 0 0
Real wage
2.0 0.0 -0.23% inflation
CPI inflation -1 -1
(RHS)
1.5 Unemployment rate -0.5 -2 -2
(RHS)
1.0 -1.0 -3 -3
2000 2003 2006 2009 2012 2015 2018 2000 2003 2006 2009 2012 2015 2018
Source: Stats NZ, RBNZ estimates. Source: Stats NZ, RBNZ estimates.
Note: Bars show the estimated contribution of each factor to wage inflation relative to Note: Dotted lines are the average rates of real wage inflation over the periods
its historical average. shown.
Figure 3.8 shows the estimated contributions of each factor based on a From 2012 to 2016 import prices fell in New Zealand dollar terms. As
simple wage Phillips curve model.4 imports make up a large share of production costs for some firms, this
may have allowed firms to pay higher real wages. Consistent with this
Employees may not have demanded higher nominal wage increases explanation, fewer firms reported rising input costs over this time.
because prices were not increasing as fast as they had historically. In
other words, while nominal wage inflation has been low, CPI inflation has Since 2017, import prices have risen in New Zealand dollar terms and
been even lower. As a consequence, real wages have increased at a more firms are reporting increasing costs. However, firms have not
higher rate on average since the GFC than before (figure 3.9). increased their selling prices by as much as their input costs have risen.
This may reflect slower demand growth and increased competition.
Growing real wages would normally be associated with higher overall
real costs for firms. But the story is more complex. While wage inflation reflects a range of factors, this analysis suggests
that past low CPI inflation has been a significant driver of low nominal
wage inflation in recent years. Firms have increased prices by less
than nominal wage inflation would suggest. Despite this, wage inflation
4 These results are in line with estimates based on more sophisticated statistical techniques. remains a significant indicator of inflationary pressures and, therefore,
23
RESERVE BANK OF NEW ZEALAND/MONETARY POLICY STATEMENT, AUGUST 2019the outlook for wage inflation is important for monetary policy. The impact Figure 3.10
of past low CPI inflation is likely to persist, but gradually diminishes over Estimates of banks’ new funding costs
time as CPI inflation rises towards 2 percent.
% %
4.0 Retail & 4.0
corporate deposits Foreign long-term
5. Has recent monetary policy easing
wholesale
3.5 3.5
passed through to bank lending rates?
3.0 3.0
Weighted-average
2.5 OCR cost of new funding 2.5
3-month OIS
Short-term
2.0 2.0
wholesale
Domestic long-term
1.5 1.5
Bank lending to households and businesses is an important channel wholesale
through which monetary policy affects the economy. Lower policy rates 1.0 1.0
2012 2013 2014 2015 2016 2017 2018 2019
reduce banks’ funding costs which, in turn, lead to lower lending rates to
households and businesses. Source: Bloomberg, interest.co.nz, RBNZ estimates.
Note: Shaded areas measure the contribution of each funding source to overall new funding costs.
Since March 2019, financial markets have anticipated more
accommodative monetary policy in New Zealand. In May, the Reserve Changes in OCR expectations and bank funding costs tend to flow
Bank cut the OCR to 1.5 percent, reinforcing expectations of easier through to interest rates on household and business loans. Business
monetary policy. However, the cost of new bank funding has declined lending rates are hard to observe, as they are often tailored to the risk
by less than the fall in market expectations for the OCR, as indicated by of each loan. Mortgage rates are more easily observable, and may be
interest rates on overnight indexed swaps (OIS) (figure 3.10). This partial indicative of changes in interest rates on business and consumer loans.
pass-through is consistent with the tightening and easing cycles between
2014 and 2016. Mortgage rates have fallen in recent months, particularly longer-term
fixed rates, which are an important driver of housing demand and house
One driver of this partial pass-through is the prevalence of deposits in price inflation (figure 3.11). The larger declines in longer-term rates are in
banks’ funding structures. Banks have not fully passed on the monetary line with larger declines in longer-term wholesale interest rates.
policy easing to deposit rates, partly because many transactional
deposits are non-interest-bearing or have interest rates that are close However, the majority of mortgage lending is on floating or fixed rates
to zero. In contrast, wholesale funding costs have declined broadly in with terms up to two years, so these rates have a larger bearing on
line with the decline in OCR expectations, consistent with historical borrowers’ cash flows. We estimate the weighted average mortgage rate
experience.
24
RESERVE BANK OF NEW ZEALAND/MONETARY POLICY STATEMENT, AUGUST 2019Figure 3.11 on new loans to have fallen by around 25-30 basis points since March,
Changes in mortgage rates since March roughly in line with the fall in bank funding costs when translated into an
(basis points)
equivalent term.
Float. 6m 1y 2y 3y 4y 5y
0 0
-10 -10 Lower interest rates will take time to flow through to the rates paid on
-20 -20 existing mortgages. Since March, the weighted average interest rate on
-30 -30 outstanding mortgages has fallen by around seven basis points. Given
-40 -40 that around half of outstanding fixed-rate mortgages are due to have their
-50 -50 interest rates reset within the coming year, the average mortgage rate will
-60 -60 likely decline further in the coming months.
-70 -70
-80 -80 Overall, recent monetary policy changes have been partially passed
-90 -90 through to mortgage rates in the same manner as in recent history.
Although banks have passed on changes in their funding costs to
Source: interest.co.nz.
mortgage interest rates, actual and expected monetary easing has not
Note: The change in rates shown for each term is based on the average of rates on
offer from ANZ, ASB, BNZ, and Westpac. fully passed through to bank funding costs.
25
RESERVE BANK OF NEW ZEALAND/MONETARY POLICY STATEMENT, AUGUST 2019Chapter 4
Economic projections
Global conditions have continued to weaken since the May Statement, • In contrast, unemployment has remained low in most major
reducing the outlook for domestic activity and capacity pressure. economies.
Domestically, increased fiscal stimulus over the projection period partially
offsets weakening global conditions. More monetary stimulus is needed Figure 4.1
to achieve our inflation and employment objectives (see chapter 2). Trading-partner GDP growth
(annual)
% %
This chapter summarises the economic projections that underpin our 6 6
Projection
policy assessment. 5 5
4 May MPS 4
Global conditions have continued to weaken 3
Aug MPS
3
2 2
• Global economic conditions have continued to weaken in 2019. 1 1
The outlook for trading-partner growth has been revised lower, and 0 0
risks are to the downside (figure 4.1). -1 -1
-2 -2
• Global trade volumes have been declining, and growth in -3
2002 2005 2008 2011 2014 2017 2020
-3
manufacturing production has slowed. Global uncertainty,
Source: Haver Analytics, Stats NZ, RBNZ estimates.
particularly around trade disputes and political developments in
Europe, has caused businesses worldwide to reduce or delay
investment and production.
26
RESERVE BANK OF NEW ZEALAND/MONETARY POLICY STATEMENT, AUGUST 2019Figure 4.2 Demand for New Zealand’s exports is slowing
Exports of services volumes
(share of potential, s.a.) • Slower growth in foreign demand is expected to weigh on domestic
10.5
% %
10.5
export volumes, particularly for services such as tourism (figure
Projection
4.2).
10.0 10.0
9.5 9.5 • The export price forecast has been revised down slightly due
May MPS
9.0 9.0 to falls in export commodity prices, such as those of dairy and
forestry. Lower export incomes dampen domestic spending.
8.5 8.5
Aug MPS
8.0 8.0
• Lower oil prices and subdued world inflation are expected to
7.5 7.5 reduce import prices (figure 4.3).
7.0 7.0
2002 2005 2008 2011 2014 2017 2020
Source: Stats NZ, RBNZ estimates.
Overseas central banks are increasing stimulus
• Due to the subdued outlook for global activity and inflation, many
Figure 4.3 overseas central banks have eased monetary policy or have
Import prices signalled that they are likely to ease in the coming year.
(foreign currency terms, s.a.)
Index
75
Index
75
• The lower outlook for world policy rates has put upward pressure
Projection
on the New Zealand dollar exchange rate, but has been broadly
offset by the lower outlook for New Zealand interest rates and
70 70 export prices.
• The New Zealand dollar TWI is assumed to remain around 73 over
65 65 the projection period (figure 4.4).
60 60
2002 2005 2008 2011 2014 2017 2020
Source: Stats NZ, RBNZ estimates.
27
RESERVE BANK OF NEW ZEALAND/MONETARY POLICY STATEMENT, AUGUST 2019Figure 4.4 Figure 4.5
New Zealand dollar TWI GDP growth
(annual)
Index Index % %
85 85 8 8
Projection Projection
80 80 6 6
Aug MPS
75 75 May MPS
4 4
70 May MPS 70
2 2
65 65 Aug MPS
0 0
60 60
55 55 -2 -2
50 50 -4 -4
2002 2005 2008 2011 2014 2017 2020 2002 2005 2008 2011 2014 2017 2020
Source: RBNZ estimates. Source: Stats NZ, RBNZ estimates.
Domestic GDP growth is expected to remain subdued in Net immigration remains elevated but is expected to
the near term decline
• Global economic conditions are expected to continue dampening • Net immigration has been declining since 2016, but remains
domestic growth. Domestic business surveys suggest that growth elevated. We assume it declines to 28,000 working-age people
momentum continued to slow into mid-2019. annually by 2021 (figure 4.6).
• We have revised down our forecast for GDP growth through 2019 • Net immigration is expected to contribute significantly to potential
to reflect this (figure 4.5). output growth over the projection period, but this contribution
declines over time.
• Fiscal and monetary stimulus is expected to contribute to higher
domestic GDP growth from late 2019.
28
RESERVE BANK OF NEW ZEALAND/MONETARY POLICY STATEMENT, AUGUST 2019Figure 4.6 Figure 4.7
Net immigration House price inflation
(annual) (s.a.)
000s 000s % %
60 60 25 25
Projection
Projection
50 50 20 20
40 40 15 15
Annual
30 30 10 10
20 20 5 5
10 10 0 0
Quarterly
0 0 -5 -5
-10 -10 -10 -10
2002 2005 2008 2011 2014 2017 2020 2002 2005 2008 2011 2014 2017 2020
Source: Stats NZ, RBNZ estimates.
Source: CoreLogic, RBNZ estimates.
Lower mortgage rates are expected to support house Figure 4.8
prices Mortgage rates
• House price inflation has continued to slow over the past year 7.5
% %
7.5
(figure 4.7). 7.0
5-year
7.0
6.5 6.5
• Recent declines in mortgage rates are expected to support house Floating
6.0 6.0
price inflation over the coming year (figure 4.8).
5.5 5.5
2-year
• Over the medium term, house price inflation remains modest as 5.0 5.0
net immigration wanes and new housing construction remains 4.5
1-year
4.5
high. 4.0 4.0
3.5 3.5
2013 2014 2015 2016 2017 2018 2019
Source: interest.co.nz, RBNZ estimates.
Note: The rates shown for each term are the average of the latest rates on offer from ANZ, ASB,
BNZ, and Westpac.
29
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