Monetary Policy Statement March 20141 This Statement is made pursuant to Section 15 of the Reserve Bank of New Zealand Act 1989. Contents 1. Policy assessment 2 2. Key policy judgements 3 3. Financial market developments 7 4. Current economic conditions 12 5. The macroeconomic outlook 20 A. Summary tables 25 B. Companies and organisations contacted by RBNZ staff during the projection round 31 C. The Official Cash Rate chronology 32 D. Upcoming Reserve Bank Monetary Policy Statements and Official Cash Rate release dates 34 E. Policy Targets Agreement 35 Appendices This document is also available on www.rbnz.govt.nz ISSN 1770-4829 1 Projections finalised on 26 February 2014. Policy assessment finalised on 12 March 2014. Reserve Bank of New Zealand: Monetary Policy Statement, March 2014 1 1 Policy assessment The Reserve Bank today increased the OCR by 25 basis points to 2.75 percent. New Zealand’s economic expansion has considerable momentum, and growth is becoming more broad-based. GDP is estimated to have grown by 3.3 percent in the year to March. Growth is gradually increasing in New Zealand’s trading partners. However, improvements in major economies have required exceptional support from monetary policy. Global financial conditions continue to be very accommodating, with bond yields in most advanced countries low and equity markets performing strongly. Prices for New Zealand’s export commodities remain very high, and especially for dairy. Domestically, the extended period of low interest rates and continued strong growth in construction sector activity have supported recovery. A rapid increase in net immigration over the past 18 months has also boosted housing and consumer demand. Confidence is very high among consumers and businesses, and hiring and investment intentions continue to increase. Growth in demand has been absorbing spare capacity, and inflationary pressures are becoming apparent, especially in the non-tradables sector. In the tradables sector, weak import price inflation and the high exchange rate have held down inflation. The high exchange rate remains a headwind to the tradables sector. The Bank does not believe the current level of the exchange rate is sustainable in the long run. There has been some moderation in the housing market. Restrictions on high loan-to-value ratio mortgage lending are starting to ease pressure, and rising interest rates will have a further moderating influence. However, the increase in net immigration flows will remain an offsetting influence. While headline inflation has been moderate, inflationary pressures are increasing and are expected to continue doing so over the next two years. In this environment it is important that inflation expectations remain contained. To achieve this it is necessary to raise interest rates towards a level at which they are no longer adding to demand. The Bank is commencing this adjustment today. The speed and extent to which the OCR will be raised will depend on economic data and our continuing assessment of emerging inflationary pressures. By increasing the OCR as needed to keep future average inflation near the 2 percent target mid-point, the Bank is seeking to ensure that the economic expansion can be sustained. Graeme Wheeler Governor 2 Reserve Bank of New Zealand: Monetary Policy Statement, March 2014 2 Key policy judgements Economic growth has increased over the past 18 months and become increasingly broad-based. Spare will all substantially affect future inflation. The Bank’s judgements on these factors are discussed below. capacity that developed initially during the 2008/09 recession has been absorbed. Inflation is rising, and The terms of trade momentum in demand growth will cause inflationary Reflecting strong prices and demand for New pressures to increase further over the medium term. Zealand’s commodity exports, the terms of trade are at a Growth continues to strengthen in New Zealand’s trading 40-year high. While dairy prices have received considerable partner economies. focus, global prices for many other commodities are also at Monetary policy’s goal in setting the Official Cash high levels. For dairy products in particular, global supply Rate (OCR) is to steer the annual rate of inflation towards is expected to increase over coming years, while strong 2 percent over the medium term (figure 2.1). Steering demand from emerging Asia is expected to continue. inflation towards the middle of the target band provides Given those forces, the projection makes a judgement that space to absorb unanticipated inflation developments. the terms of trade, while moderating, will remain elevated With the economy growing rapidly, CPI inflation at 1.6 by historical standards. The strength in the terms of trade percent in the year to December 2013 and inflationary will continue to boost New Zealand incomes, spending pressures rising, the current degree of monetary stimulus power and demand growth over the medium term. is no longer necessary. Therefore the OCR is projected to increase. While demand growth in emerging economies is boosting commodity prices, there are still risks that could cause the terms of trade to deteriorate more markedly Figure 2.1 CPI inflation (annual) than projected. Weaker demand and weaker prices for New Zealand’s exports could arise if financial disruption occurred in China following the rapid increase in debt % over recent years. The withdrawal of monetary stimulus % 6 6 in the United States could also lead to greater volatility 5 5 in emerging economies’ financial markets than has 4 4 been seen thus far. At the same time, there is a risk that 3 3 2 2 1 1 Projection Source: Statistics New Zealand, RBNZ estimates. 0 2006 2008 2010 2012 2014 2016 high prices encourage global supply of dairy and other commodities to rise more than expected. The New Zealand dollar New Zealand’s relatively favourable outlook for 0 growth, and expectations that inflationary pressures will rise more quickly here than in other economies have and contributed to the New Zealand dollar remaining elevated. consequently how far interest rates need to move, will Strong demand for commodity exports and strength in depend importantly on how households and businesses commodity export prices have also played a part. How inflationary pressures develop, respond to the economic environment. The extent of The New Zealand dollar Trade Weighted Index the pick-up in construction activity, how migration flows (TWI) is expected to moderate gradually over coming develop, how persistent the recent moderation in house years. Nevertheless, the elevated level of the New price inflation is, and how households respond to rising Zealand dollar remains a headwind to the tradable sector interest rates after an extended period of very low rates, and continues to keep tradables inflation low. Reserve Bank of New Zealand: Monetary Policy Statement, March 2014 3 Construction and the Canterbury rebuild market momentum may have eased in recent months, Increases in construction activity will continue to and house price inflation is forecast to moderate steadily provide a significant boost to demand over coming years. over the projection. The projection takes a view that speed Nationwide construction spending is expected to rise as a limits on high loan-to-value lending will contribute to a share of GDP, to a level similar to that in the mid-2000s, moderation in the housing market over 2014. Mortgage and remain strong for several years. An important driver rate increases, combined with high household debt, are is reconstruction in Canterbury, which is expected to total also expected to weigh on house price inflation, offsetting about $40 billion (in 2013 dollars). Construction activity the boost to demand from high net immigration. Box B elsewhere in New Zealand is also expected to increase provides more-detailed discussion of how such forces are over the projection, particularly in Auckland in response to affecting the housing market. Against a backdrop of high house price inflation, a shortage of housing. Strong construction activity is expected to growing incomes and low interest rates, real household underpin non-tradables inflation over coming years. spending accelerated over the past year. Annual The Bank’s forecast includes a view that cost spill-overs consumption growth is expected to remain near 3.5 percent from Canterbury reconstruction to other regions and over the next two years, supported by continued income industries will be limited. However, the risk of stronger cost growth. As consumption growth continues, the household spill-overs is increasing, with the labour market in saving rate is projected to fall over the second half of the Canterbury having tightened and capacity pressures projection. That said, the cycle in consumption and saving increasing in other sectors. is expected to be modest compared with that in the mid2000s, reflecting the view that household prudence and Net immigration high debt will influence household decisions. Net inward migration increased sharply over the After an extended period of low interest rates past 18 months. The increase in population has boosted and with household debt still high, there is perhaps demand and inflation in the housing market, as well as more uncertainty than normal about how households will wider consumer demand. While annual net immigration is respond to rising interest rates. The Bank will monitor how expected to ease gradually, it will remain above average spending and demand in the household sector develop through the projection period. over coming quarters. A significant share of the increase in net immigration comes from a drop in departures of New Inflation and monetary policy Zealand citizens to Australia, in a period when New Over the past 18 months growth in demand Zealand’s unemployment rate has been decreasing and has absorbed spare capacity in the economy. Inflation Australia’s increasing. A judgement behind our projections has begun to increase and inflationary pressures are is that migration flows will ease gradually, as economic expected to increase further over the medium term. This is conditions improve in Australia and other economies. expected to be the case despite the increase in the growth Experience of past migration cycles does, however, rate of the economy’s productive capacity. The Bank’s remind us that turning points are hard to predict, and flows estimate of potential GDP growth has been revised up can reverse quickly. following recent increases in net immigration and labour market participation, and upward revisions to business The housing market and household demand investment. In setting the OCR, monetary policy aims to House prices rose by nearly 9 percent in the year steer annual inflation towards 2 percent over the medium to the January 2014 quarter. There are signs that housing term. In the face of weak inflationary pressures following 4 Reserve Bank of New Zealand: Monetary Policy Statement, March 2014 the 2008/09 recession, interest rates were low for an The Bank’s assessment is that the OCR will need extended period, supporting the recovery. With inflation to rise by about 2 percentage points over the next two now rising and inflationary pressures building, there is a years for inflation to settle around target. That assessment need to return interest rates to more-normal levels. Doing is conditional on the economic outlook, and will be re- this will help to ensure that economic activity moves more assessed over time as new data are released and events in line with the potential growth of the economy, promoting unfold. a more-sustainable expansion. Reserve Bank of New Zealand: Monetary Policy Statement, March 2014 5 Box A Recent monetary policy decisions In recent years it has been appropriate to hold sector. With signs of strong momentum in economic the OCR at the historically low level of 2.5 percent (figure activity, inflationary pressures are expected to become A1). This reflected a balance between New Zealand’s more pronounced over the next two years (figure A2). gradual recovery from the 2008/09 recession ­­with – As the outlook for economic output has strengthened related weak inflation – and the likelihood that medium- over the past year, the Bank’s projection for the 90-day term inflationary pressures would increase. interest rate has been gradually revised upward (figure A3). Figure A1 Official cash rate % % 9 9 Figure A2 CPI inflation (annual) 8 8 7 7 6 6 5 5 5 4 4 4 3 3 3 2 2 2003 2005 Source: RBNZ. 2007 2009 2011 2013 Low interest rates, combined with high export % % 6 6 5 Actual and Mar 2014 forecast 4 Forecasts (Mar 2013 to Dec 2013) 2 3 2 1 1 0 2006 2008 2010 2012 Source: Statistics New Zealand, RBNZ estimates. 2014 0 prices and strong domestic drivers of demand growth (such as construction activity) have supported a recovery in GDP in recent years. The economy has now been growing faster than potential growth for some time, with growth increasingly widespread and self-sustaining. As a Figure A3 90 day interest rate % absorbed. 7 strengthening demand has resulted in increases in inflationary pressures, particularly in the non-traded 6 9 Actual and Mar 2014 forecast 8 to remain low as the recovery became established, 10 9 result, spare capacity in the economy has been gradually While it was appropriate for interest rates % 10 8 7 6 6 Forecasts (Mar 2013 to Dec 2013) 5 4 3 2 5 4 3 Source: RBNZ estimates. 2006 2008 2010 2012 2014 2 Reserve Bank of New Zealand: Monetary Policy Statement, March 2014 3 Financial market developments Financial market sentiment remains positive, From early January 2014, investors became with global equity market indices close to new highs. The more risk averse. This reflected concerns about slowing United States Federal Reserve began its long-awaited growth and financial stability in China, a mixed corporate move towards tapering asset purchases in December, but earnings season and softer economic data in the United this has not led to higher bond rates. In fact, the United States, and various idiosyncratic events in emerging States’ bond market has been well supported as economic market countries. Some key equity indices fell in the order growth indicators in that country have disappointed, of 6 to 7 percent, emerging market currencies depreciated keeping yields low. and investors headed towards the safety of advanced- In New Zealand, monetary policy expectations economy government bond markets. However, that period have not changed significantly, with the 2-year swap of risk aversion did not last long and equity markets rate trading in a very narrow range since the December bounced back to the levels of end-2013 (figure 3.1). At the Statement. Following the January OCR review, the time of writing, European equity market indices showed a overnight indexed swaps (OIS) market moved to show marked decline, as political tensions escalated in Ukraine a high probability of the Reserve Bank raising the OCR and reinforced flight-to-safety portfolio flows. by 25 basis points at the March Statement, followed by a series of further increases during the following two years. At the time of writing about 110 basis points of OCR increases are priced in for calendar year 2014. Marginal funding costs for local trading banks have fallen due to lower term deposit spreads to wholesale Figure 3.1 MSCI World Equity Indices (United States dollar indices rebased to 1 January 2012 = 100) Index Index rates. Re-financing long-term debt has been relatively 160 easy in the current global financial environment. Interest 150 rates on fixed-rate mortgages are up slightly since the 140 140 December Statement, a lagged response to the higher 130 130 wholesale rates of November. Borrowers continue to 120 120 110 110 gradually migrate from floating to fixed-rate mortgages. The New Zealand dollar TWI has remained in a tight range since mid-September, between about 76 and 79. International market developments 160 Developed markets 100 Emerging markets 90 2012 Source: Datastream. 2013 150 100 90 Monetary policy remains a key focus for financial Global developed equity markets ended 2013 on markets as the time to reduce policy stimulus in major a strong note, continuing the positive run seen through economies draws closer. Of the major central banks, most of the year. Benchmark indices in the United States, only the United States Federal Reserve has started Europe and Japan all reached new highs. The MSCI that process while the others have made only modest World Equity Index (developed markets) in United States tweaks in communication. Market expectations show that dollar terms ended 2013 up 27 percent. Emerging market global short-term interest rates are expected to remain equities continued to significantly lag as investors pulled historically low through 2014, before a more convincing money out of those regions. The MSCI emerging market pick-up emerges in 2015 (figure 3.2, overleaf). equity index was down 2 percent in United States dollar terms in 2013. Reserve Bank of New Zealand: Monetary Policy Statement, March 2014 7 Figure 3.2 3-month interest rate futures – change expected from March 2014 level Basis points stimulus will need to remain exceptional for some time. The Bank of Japan continued with its stated policy aim of doubling the monetary base by the end of 2015 by buying Basis points 200 government bonds (and other assets in much smaller 200 150 150 United Kingdom 100 Australia believes that the most prudent course is likely to Australia 100 United States 50 volume) on the secondary market. The Reserve Bank of Euro area 0 50 0 Japan −50 Jan 14 Jul 14 Source: Bloomberg. Jan 15 Jul 15 Jan 15 Jul 15 −50 be a period of stability in interest rates. Risk appetite for exposure to emerging markets deteriorated early this year, resulting in gross portfolio outflows. One data provider, EPFR Global, reported that in the six weeks to mid-February investors had withdrawn USD 30 billion from emerging market bond and equity funds, greater than total withdrawals for all of 2013. A number of factors were behind the sell-down, including The United States Federal Reserve took the increased concern about risk in China’s shadow banking first step back towards conventional monetary policy in sector, concerns about declining global liquidity as the December, reducing the pace of its asset purchases of Federal Reserve continues to taper its asset purchases, Treasuries and agency bonds by USD 10 billion to USD 75 and some idiosyncratic economic and political factors in a billion. At the end of January, this was reduced by a further number of countries. USD 10 billion to USD 65 billion per month. Guidance by As emerging market currencies fell, the central officials has been that asset purchases will continue to be banks of Brazil, South Africa, Turkey and India increased reduced in measured steps, and it would take a significant interest rates to stem the outflow of portfolio capital and change in economic outlook for the Federal Reserve to reduce inflation risks. In a separate and more recent divert from that course. idiosyncratic event, Russia’s central bank raised its policy Market reaction across the United States dollar, equity and bond markets has been limited due to markets rate by 150 basis points to 7 percent to stem the decline in the rouble as political tensions escalated in Ukraine. anticipating the change in United States monetary policy. Market analysts believe that the People’s Bank of That likely reflects the clear guidance provided on the China’s (PBoC’s) stance on monetary policy has changed. outlook for the Federal Funds Rate. New Federal Reserve They believe that the PBoC’s actions are behind a recent Chair Janet Yellen promised continuity in monetary policy, unusual depreciation of the Renminbi to introduce clarifying the Federal Reserve’s forward guidance that the two-way risk into the currency before further liberalisation policy rate is likely to remain low well past the time that the of its financial markets. To achieve this, the central bank unemployment rate declines below 6.5 percent. Current looks to have bought foreign currency and thereby eased Federal Funds futures pricing predicts the first rate hike domestic liquidity pressures, resulting in a reduction in will be in mid-2015, consistent with Federal Open Market money market rates. Committee members’ expectations. Other major developed central banks have made Financing and credit little change to their monetary policy stance. In early Through much of last year (and more so over the March the European Central Bank (ECB) reiterated second half), the market was focused on the anticipated forward guidance that the key ECB policy rates would tapering of asset purchases by the United States Federal remain at present or lower levels for an extended period. Reserve. At times, this led to increased volatility in bond The Bank of England believes that the degree of monetary yields alongside a significant 140 basis point increase in 8 Reserve Bank of New Zealand: Monetary Policy Statement, March 2014 the United States 10-year Treasury bond rate between of these nations’ 10-year bond yields to Germany’s yields May and September. However, by the time the Federal remain high but are down to about three-year lows (figure Reserve announced its tapering policy in mid-December 3.4). the market was well prepared, so market reaction was limited. Since then, global bond markets have been well supported, with the current United States 10-year government bond rate of 2.7 percent slightly lower Figure 3.4 10-year government bond spreads to Germany Basis points Basis points 1600 compared to the pre-taper level (figure 3.3). 1600 1400 1200 Figure 3.3 10-year government bond yields 1200 1000 1000 800 % % 4 4 800 Portugal 600 400 3 United Kingdom 2 2 600 400 Spain 200 United States 3 1400 Ireland 0 2009 Source: Reuters. 200 Italy 2010 2011 2012 2013 0 Germany 1 1 decline. The spread on Barclays Capital’s global corporate Japan Source: Reuters. 0 Jan12 Jul12 Jan13 Corporate credit spreads have continued to Jul13 0 Jan14 bond index fell to 115 basis points in late February, the lowest level since the end of 2007. Conditions have been more challenging in Global government bond yields in Europe followed emerging markets, with the emerging markets to United a similar path, with bond markets well supported given States sovereign spread higher compared to the levels policy rates remained close to zero. The largest movements of one year ago (310 basis points vs 250 basis points), have been in the peripheral countries that have received indicating that investors are shifting portfolio flows away international bail-outs in recent years. Financial market from this region. fragmentation in the euro area appears to be receding, As with global markets, yields on Australian and with lending and borrowing rates converging. Funding New Zealand government bonds are lower than at the conditions for Europe’s weakest banks are the best since time of the December Statement. The NZ-US 10-year the onset of the European debt crisis, despite the lack of bond spread has fallen back down to about 180 basis progress towards an effective euro area banking union. points, after peaking at 215 basis points in October. These banks have seen strong demand for their debt at the lowest yields since the crisis. The issuance of New Zealand dollar-denominated debt by overseas entities (Kauris) has remained strong, At a country level, financially troubled nations with $2.3 billion worth launched in the first two months such as Portugal and Ireland have successfully returned of the year. This follows on from the more than $5 billion to the bond market, with investors keen to add these new of issues last year. Issuers are meeting the demands of issues to their portfolios. Portugal covered a third of its investors who want exposure to the New Zealand dollar, funding needs for 2014 in an issue earlier this year, while a high credit rating and good relative yields. At the same Ireland is already fully funded for 2014 and has begun to time the issuers can diversify their funding base and swap pre-fund for 2015. Spain saw extremely high demand of that debt back into their home currencies at attractive €40 billion for a new syndicated 10-year issue. Spreads rates for them. Reserve Bank of New Zealand: Monetary Policy Statement, March 2014 9 Local bank funding costs continue to fall. This Foreign exchange market reflects strong deposit growth of around 10 percent over The New Zealand dollar TWI has oscillated within the past year, which is covering the funding needs for new a fairly tight range – about 76 to 79 – since September. credit, and favourable global funding conditions. The key Remarkably, since the December Statement there has driver of falling marginal funding costs is retail deposits. been little point-to-point movement in the key cross rates Retail deposits make up more than 50 percent of total we monitor. Investors have recognised the positives for bank funding. For banks, deposit flows have surprised to New Zealand’s outlook in the forms of the high terms of the upside over at least the past six months, so there is a trade and domestic growth momentum. The consequent lack of competitive pressure to seek this source of funding. expectation of rising interest rate differentials has been Within retail deposits there has been a compositional priced into the yield curve, as discussed overleaf, which change towards more on-call savings at the expense of is also reflected in the current level of the exchange rate. term deposits. Savers are less inclined to lock in a term deposit when interest rates are expected to rise, and there has been some competitive pressure to offer attractive “bonus” rates for on-call savings accounts. Despite rising wholesale rates as the market Figure 3.6 New Zealand dollar cross rates (indexed to 100 at 1 January 2012) Index prices in tighter monetary policy (see later), the 6-month term deposit rate has remained steady for the last nine 140 months. Thus, the term deposit spread to bank bills has Index 150 130 fallen by 60 basis points over that period (figure 3.5). Figure 3.5 6-month term deposit spread to 6-month bank 200 Basis points 200 NZD−JPY 140 130 NZD−AUD 120 120 110 110 100 90 Basis points 150 NZD−USD Source: Reuters. Jan 12 Jul 12 Jan 13 Jul 13 100 90 Jan 14 150 150 Of the five currencies that make up the TWI basket 100 100 the yen has been the strongest to date in 2014 (figure 3.6). 50 50 0 0 −50 −50 −100 −100 Source: RBNZ. 2007 2008 2009 2010 2011 2012 2013 This reverses the trend in 2013 when the yen weakened significantly and speculative accounts held significant short positions. These positions have been gradually unwound as the outlook for the USD-JPY currency has become more balanced. In January, the NZD-AUD cross rate traded close to 0.95, before retreating as views on the two currencies That said, there have been recent signs that credit became more balanced, in contrast to the prevailing trend. growth has now caught up with deposit growth. If recent trends continue, banks will need to look increasingly to offshore wholesale markets for new sources of funding. 10 Reserve Bank of New Zealand: Monetary Policy Statement, March 2014 Other domestic financial market developments 2-year swap rate is flat relative to mid-December, the 10year swap rate has fallen by about 15 basis points. The NZX50 was up just over 5 percent in the first Reflecting higher wholesale rates up until two months of the year, following the 16 percent gain in the December Statement, fixed-term mortgage rates 2013. The positive domestic economic outlook and trends increased. Since then, mortgage rates have stabilised in global equities have been supporting factors. consistent with the stabilisation of short-term swap rates. The OIS market suggests that expectations of Some banks have offered mortgage specials for 2- and OCR increases through the next year or so have changed 3-year fixed rates, as banks compete to attract borrowers little since the December Statement. To be sure, leading up looking to lock in current rates and move away from to the January review there was some variation in pricing floating-rate mortgages. for that meeting, but overall pricing has been relatively The proportion of mortgages on fixed terms stable. This is reflected in the very narrow trading range continues to grow. At the end of January, 40 percent of of about 10 basis points for the 2-year swap rate since mortgages remained on floating rates, down from 53 the December Statement. The OIS market shows some percent a year earlier. The bulk of fixed-rate mortgages 24 basis points of OCR rate hikes have been priced in for are at short durations, with the average time to re-price the March Statement, a total of 63 basis points by June, these sitting at 14 months (figure 3.8). Some 73 percent of and 110 basis points by the end of the year (figure 3.7). mortgages are floating or at a fixed rate of less than one Swaps pricing is consistent with about 170 basis points of year. Over the past six months there has been an uptick interest rate increases by the end of 2015. in borrowers fixing for more than two years, but this still makes up a small proportion of the total. Figure 3.7 2-year swap rate, OCR and modelled market expectations of OCR % % 9 Figure 3.8 Average time to re-price mortgage book Months 9 8 22 7 7 20 6 6 Months 24 8 5 2−year swap rate 4 3 4 3 2 Modelled OCR expectations 1 Source: RBNZ, Bloomberg. 0 5 2008 2009 2010 2011 2012 2013 2014 2015 24 22 20 18 Fixed 18 16 16 14 14 12 12 10 2 8 1 6 0 4 All mortgages 10 8 6 Source: RBNZ. 1999 2001 2003 2005 2007 2009 2011 2013 4 Market liaison suggests that offshore investors are more inclined than domestic investors to believe that too much monetary tightening is priced into the curve. In their view, a profitable strategy is to put on trades that would benefit from a reduced pace of tightening than is currently priced. The yield curve has continued to flatten, as is typical leading up to a tightening cycle. Whereas the Reserve Bank of New Zealand: Monetary Policy Statement, March 2014 11 4 Current economic conditions Real GDP in the March quarter 2014 is estimated to be 3.3 percent higher than a year earlier. With stronger demand growth, consumer and business sentiment have Figure 4.2 New dwelling consent issuance (quarterly, seasonally adjusted) increased substantially (figure 4.1). The expansion in GDP 000s 000s 5 over the past three years has steadily absorbed spare resources and inflationary pressures have started to build. 5 4 3 March quarter. 2 Figure 4.1 Consumer confidence and experienced own activity by businesses (standardised, seasonally adjusted) Index 1 1 2 1 Canterbury 0 2000 Source: Statistics New Zealand. 2002 2004 2006 2008 2010 2012 0 Through the production of building materials, parts 2 Consumer confidence (ANZ−Roy Morgan) 3 Auckland 1 Index 2 4 Rest of New Zealand Annual CPI inflation is estimated to be 1.7 percent in the of New Zealand’s manufacturing sector have a significant exposure to the construction sector.1 Partly reflecting this, in 2013 the Performance of Manufacturing Index has 0 0 −1 −1 −2 Business domestic trading activity −2 (QSBO) 4.3), while the accumulation of stock is reportedly low. In −3 addition to domestic demand for manufacturing goods, −3 Source: NZIER, ANZ Roy Morgan, RBNZ estimates. 2003 2005 2007 2009 2011 2013 moved firmly to levels that indicate expansion. Driving that increase are strong orders and production (figure external demand for New Zealand’s manufactured exports appears to have held up. Domestic demand Construction has been a key driver of aggregate GDP growth. Post-earthquake reconstruction in Canterbury Figure 4.3 Performance of Manufacturing Index (seasonally adjusted) has contributed to strong increases in building work, Index Index 70 with a significant further increase in both residential and 70 65 non-residential building expected over the coming year. 60 Residential construction has also continued to increase in New orders Production 65 60 55 55 Auckland, where there is a shortage of dwellings, and in 50 50 other parts of the country. Dwelling construction outside 45 Canterbury remains at a low level by historical standards 40 (figure 4.2). 35 1 12 40 35 2009 2010 Source: BNZ-BusinessNZ. 30 45 Finished stocks 2011 2012 2013 30 From Statistics New Zealand’s input-output tables for 2007, a 1 percent expansion in construction output requires a 0.38 percent expansion in manufacturing activity. See Gael Price (2012), ‘Building a picture of New Zealand manufacturing’, AN 2012/11, Reserve Bank of New Zealand. Reserve Bank of New Zealand: Monetary Policy Statement, March 2014 Strong net immigration is supporting domestic Housing shortages in Auckland and Canterbury, demand growth. Net permanent and long-term migration strong net immigration and low interest rates have resulted has increased from an annual net outflow of around 4,000 in high annual house price inflation. However, momentum people in mid-2012 to a net inflow of around 26,000 people in the housing market appears to have eased in recent in January 2014. A large part of the increase comes from months. Box B discusses this in more detail. a drop in departures of New Zealand citizens to Australia Real consumer spending is currently growing (figure 4.4), as the labour market outlook in New Zealand at about 3.5 percent in annual terms. Nominal spending continues to strengthen while that in Australia has softened outpaced income growth between March 2011 and March (figure 4.5). 2013, resulting in the household saving rate deteriorating by 1.6 percentage points and becoming negative. Figure 4.4 Migration of New Zealand citizens with Australia, permanent and long-term (annual totals of quarterly data, seasonally adjusted) 000s 30 trade, saving is estimated to have improved in the year to March 2014. Business 50 Departures to Australia 40 Net outflow of NZ citizens to Australia 30 20 20 10 10 Arrivals from Australia 0 2000 Source: Statistics New Zealand. 2002 2004 2006 2008 2010 2012 0 has led to a pick-up in survey measures of profitability (figure 4.6) and placed growing pressure on productive resources. As a result, businesses have increased their demand for both labour and physical capital. Figure 4.6 Surveyed profits (standardised, seasonally adjusted) Index 3 ANZBO (next 12 months) 2 1 0 0 −1 QSBO (past 3 months) −2 QSBO (next 3 months) −3 8 8 New Zealand 7 7 6 6 5 5 Australia 4 4 3 2000 3 Source: Statistics New Zealand, Haver Analytics. 2008 2010 2012 2 1 % 2006 considerably 3 % 2004 improved Index Figure 4.5 Unemployment rate in Australia and New Zealand (seasonally adjusted) 2002 conditions through the second half of 2013. Increasing final demand 000s 50 40 Reflecting the boost to incomes from the high terms of −4 2000 2004 2006 2008 −2 −3 Source: NZIER, ANZ National Bank, RBNZ estimates. 2002 −1 2010 2012 −4 Business investment strengthened through the middle of 2013, adding to growth in both domestic demand and imports. Labour demand has been growing, with filled jobs having increased by 1.9 percent and the number of people employed by 3 percent in the year to December 2013 (figure 4.7, p. 16.). Reserve Bank of New Zealand: Monetary Policy Statement, March 2014 13 Box B Recent developments in the housing market Growth in house prices increased rapidly over the past year, particularly in Auckland and Canterbury Figure B2 House sales (monthly, seasonally adjusted) 000s 000s 12 12 11 11 10 10 appears to have moderated in recent months due to 9 9 the speed limit on high loan-to-value (LVR) lending and 8 8 7 7 6 6 5 5 4 4 (figure B1). However, momentum in the housing market rising mortgage interest rates. Figure B1 House price inflation by region (annual, three month moving average) % 45 40 Rest of 35 South Island 30 25 20 15 10 5 0 −5 Christchurch −10 −15 2000 2002 3 2000 Source: REINZ. % Rest of North Island Wellington Auckland Source: REINZ, RBNZ estimates. 2004 2006 2008 2010 2012 45 40 35 30 25 20 15 10 5 0 −5 −10 −15 2002 2004 2006 2008 2010 2012 Figure B3 Nationwide house price inflation (annual) % 20 15 % 3 Annual (3 month moving average) 2 10 1 5 0 0 −5 −1 −10 In January, house sales fell for the fourth consecutive month (figure B2). Since September, house sales have fallen 12 percent, with this decline reasonably broad-based across regions. The slowing in sales 3 Monthly (RHS) −15 −20 Source: REINZ. 2006 2008 2010 2012 −2 −3 activity now also appears to be showing up in prices. Much of the easing in house price inflation is In seasonally-adjusted terms, house prices were flat in likely to be related to the impact of speed limits on high the month of December and fell 0.3 percent in January LVR lending that came into effect on 1 October 2013. (figure B3). Annual house price inflation has eased to Evidence to date is consistent with our December MPS 8.8 percent in January 2014 from 9.7 percent in October. projection that LVR restrictions would subtract between 1 and 4 percentage points from annual house price inflation over the first year of implementation. However, the recent weakness in housing market data suggests that the impact of the LVR policy may be more frontloaded. 14 Reserve Bank of New Zealand: Monetary Policy Statement, March 2014 Rising mortgage interest rates are also slowing may increase over the coming year as banks adjust fully the housing market. Mortgage interest rates have to the introduction of the LVR restrictions. There is also increased over the past six months and interest rates uncertainty about the extent to which the increase in are expected to rise further over the projection horizon net immigration over 2013 is currently supporting house (figure B4). prices. Figure B4 90-day interest rate Figure B5 Share of new residential mortgages at LVRs greater than 80 percent (monthly) % % 10 Projection 10 9 9 8 8 7 7 6 6 5 5 4 4 3 3 2 Source: RBNZ estimates. 2006 2008 2010 2012 2014 2016 2 It is too early to determine how persistent the slowing in housing market momentum will be. After declining to below 5 percent of new mortgage lending in % 40 35 % 40 Private reporting 35 30 30 25 25 LVR survey 20 15 10 15 10 LVR speed limit 5 0 20 Oct11 Apr12 Oct12 Apr13 Source: RBNZ. Note: LVR survey data are after exemptions. 5 Oct13 0 January (figure B5), the proportion of high LVR lending Reserve Bank of New Zealand: Monetary Policy Statement, March 2014 15 Figure 4.7 Persons employed and jobs filled (annual, seasonally adjusted) % % 6 6 5 5 4 4 HLFS numbers employed 3 2 3 2 1 1 0 0 −1 −1 QES filled jobs −2 −2 −3 −3 −4 2000 −4 Source: Statistics New Zealand. 2002 2004 2006 2008 2010 2012 Partly offsetting robust demand by businesses and households is continuing fiscal consolidation. Fiscal Figure 4.8 GDP growth in selected trading partner economies (annual) % % 20 20 15 15 China ASEAN 10 5 5 0 Australia 0 Western NIEs −5 −10 10 −5 −10 Source: Haver Analytics. Note: ASEAN includes Thailand, Malaysia, Indonesia, and the Phillipines. NIEs include South Korea, Taiwan, Hong Kong, and Singapore. Western economies include the United Kingdom, the United States, Canada and the euro area. 2002 2004 2006 2008 2010 2012 consolidation is occurring through a combination of limited Japan is currently growing at an annual rate of growth in government spending and increases in taxes on 2.7 percent, significantly higher than the average of the tobacco and petrol. past decade. Domestic demand has expanded rapidly as External conditions a result of both fiscal and monetary stimulus over the past New Zealand’s trading partners’ GDP grew at a year. moderate pace over 2013 (figure 4.8). Growth in major The Australian economy grew at a below-average advanced economies has improved, and is an important pace of 2.8 percent over the year to December 2013, as influence on activity in emerging markets. Spare capacity resource investment declined. Lower interest rates appear remains in trading partner economies, holding down to be supporting the housing market, and are beginning to global inflation and growth in New Zealand’s import prices. support other sectors with stronger growth in retail sales Considerable monetary stimulus remains in place in major and improvements in business confidence. The labour advanced economies. market has continued to soften, with employment growth Growth in the United States reached 2.5 percent in slowing to zero on an annual basis. The unemployment the year to December 2013. While fiscal consolidation has rate has reached 6 percent, which is its highest level in weighed on growth over the past few years, consumption over a decade. has continued to rise steadily. Labour market conditions In China, GDP grew 7.7 percent in the year to December 2013. Domestic demand appears to have continue to gradually improve. In the euro area, growth has increased to 0.5 slowed slightly towards the end of the year, as support from percent in the year to December 2013, and the economy government infrastructure investment has begun to fade, expanded in each of the last three quarters of 2013. Survey and liquidity conditions have tightened. However, exports measures of business activity improved substantially over to large advanced economies have begun to increase, 2013, and suggest moderate growth at the beginning of reflecting the continued recovery in those economies. 2014. Fiscal consolidation continues, albeit at a reduced pace. Overall, trading partner growth has seen demand for New Zealand’s goods exports remain robust. Increasing rates of urbanisation and protein consumption in China are 16 Reserve Bank of New Zealand: Monetary Policy Statement, March 2014 supporting demand for many of New Zealand’s commodity exports (figure 4.9). There are signs of recovery in New Zealand tourism revenue. While Australian visitors still make up the majority of tourists into New Zealand, the number Figure 4.9 Share of primary exports to China (annual total) of visitors from China increased substantially in 2013. Visitors from Europe and the United States have also increased more recently. % % 60 The New Zealand dollar exchange rate remains 60 Wool 50 Forestry 40 high, including in real effective terms (that is adjusting for 50 differences in inflation between countries) (figure 4.11). 40 While strength in the exchange rate is being supported by 30 Dairy Fish 30 Lamb 20 20 10 Beef 10 0 2000 2002 2004 2006 2008 2010 2012 2014 Source: Statistics New Zealand. 0 strong demand for commodity exports, the high exchange rate remains a drag on incomes and competitiveness in the tradables sector. The high exchange rate is dampening the New Zealand price of imported goods, lowering tradables inflation and supporting demand by households and businesses for imported goods. Consequently, global prices of New Zealand’s commodities are extremely high, particularly for dairy. Dairy prices increased substantially in the first half of Figure 4.11 New Zealand dollar exchange rates Index 2013 and remain at those high levels (figure 4.10). Following last summer’s drought, milk production in New 75 Zealand has been strong thus far in the 2013/14 season. Index 80 70 Quarterly TWI 80 75 70 support for milk production in the event that soil moisture conditions in the North Island deteriorate further over the remainder of the season. 65 60 60 55 High supplementary feed stocks should provide some BIS real effective exchange rate 65 55 50 Figure 4.10 GlobalDairyTrade price index Index Index 1700 1700 50 Source: RBNZ, Bank for International Settlements. Note: The BIS real effective exchange rate series is for the BIS’s broad 61 country basket and is re-based to equal the TWI index value in January 2006. 2006 2007 2008 2009 2010 2011 2012 2013 1500 1500 1300 1300 Business surveys suggest capacity pressures 1100 1100 are developing in relation to physical capital, and also to 900 900 700 700 500 2009 2010 Source: GlobalDairyTrade. 2011 2012 2013 500 Cyclical and inflationary pressures some degree in the labour market (figure 4.12, overleaf). While pressures in the labour market are strongest in Canterbury, surveys suggest that pressures in the labour market are also developing in the rest of the country. Business surveys are pointing to tighter labour market conditions than some labour market data would suggest. While the unemployment rate has fallen to 6 Reserve Bank of New Zealand: Monetary Policy Statement, March 2014 17 percent, increasing labour force participation (figure 4.13) is limiting the degree of the fall in the unemployment rate. Increasing rates of participation over 2013 are being encouraged by the cyclical improvement in the economy % 4 ANZBO one−year ahead Figure 4.12 Surveyed capacity measures (standardised, seasonally adjusted) 3 3 2 Index 2 % 4 and employment growth. 3 Figure 4.14 Inflation expectations (annual) Index 3 Capacity as a limiting factor 2 Capacity utilisation 1 1 0 0 −1 1 2000 Source: RBNZ, Aon Hewitt, ANZ National Bank. 2002 2004 2 RBNZ two−year ahead AON four−year ahead 2006 2008 2010 1 2012 −1 CPI inflation increased to 1.6 percent in the year −2 to December 2013, as the drag from low tradable inflation −3 −3 reduced, and pressures in the non-traded sector continued −4 2000 −4 to accumulate (figure 4.15). While still negative, tradables Difficulty finding skilled labour −2 Source: NZIER, RBNZ estimates. 2002 2004 2006 2008 2010 2012 inflation has increased over the past six months. The Bank will monitor whether firms’ pricing behaviour in response to Figure 4.13 Labour force participation rate the high exchange rate is changing as domestic demand conditions strengthen. % % 70 70 Figure 4.15 CPI inflation (annual) 69 69 68 68 67 67 66 66 65 65 5 4 4 64 2000 64 3 3 2 2 1 1 Source: Statistics New Zealand. 2002 2004 2006 2008 2010 2012 Nominal wage inflation has so far been subdued: the Labour Cost Index measure of private sector wages increased by just 1.7 percent in the year to December. In part, this reflects lingering unemployment, low headline inflation over the past year and the declines % % 7 7 Non− tradables 6 0 −1 6 5 0 Headline −2 −1 −2 Tradables −3 2000 Source: Statistics New Zealand. 2002 2004 2006 2008 2010 2012 −3 in inflation expectations in recent years (figure 4.14). The absorption of spare capacity in the economy Nevertheless, real wage inflation – wages adjusted for has contributed to non-tradables inflation increasing to inflation expectations – is broadly consistent with the pick- about 3 percent. An important contributor to increasing up in economic growth and measures of labour market non-tradables inflation has been the pick-up in construction tightness. cost inflation. Construction cost inflation in Canterbury has 18 Reserve Bank of New Zealand: Monetary Policy Statement, March 2014 moderated in recent months, but has been increasing in Auckland (figure 4.16). At 4.7 percent, construction cost inflation is at its historical average rate, and is currently evolving in line with aggregate capacity pressures in the Figure 4.17 Headline and selected core inflation measures (annual) % % 6 economy. 6 5 Figure 4.16 Construction cost inflation (annual) 4 3 4 Factor model % % 14 12 10 10 0 2000 2 1 12 3 Trimmed mean 2 14 Canterbury 8 6 8 New Zealand 4 6 4 2 Auckland 2 0 0 −2 Source: Statistics New Zealand. 2008 2010 5 Headline CPI 2012 1 Weighted median Source: Statistics New Zealand, RBNZ estimates. 2002 2004 2006 2008 2010 2012 0 Figure 4.18 Pricing intentions (standardised, seasonally adjusted) −2 Measures of underlying inflation have picked up, indicating broader-based increases in inflationary Index Index 4 4 3 3 ANZBO next 3 months 2 2 1 1 0 0 pressures in the economy (figure 4.17). Surveyed pricing −1 intentions have continued to pick up over the past two −2 years (figure 4.18), indicating increasing domestic −3 inflationary pressure. −4 2000 −1 QSBO next 3 months −2 −3 Source: NZIER, ANZ National Bank, RBNZ estimates. Reserve Bank of New Zealand: Monetary Policy Statement, March 2014 2002 2004 2006 2008 2010 2012 −4 19 5 The macroeconomic outlook The New Zealand economy is expected to grow at an average annual pace of about 3.5 percent over the next year, with growth moderating thereafter (figure 5.1). Growing pressure on productive resources is expected to cause inflationary pressures to increase further. In that environment, interest rates are projected to rise to contain this increase such that CPI inflation settles near 2 percent Figure 5.2 Trading partner GDP growth (contributions to quarterly growth, seasonally adjusted) Ppts Ppts 2.0 Projection Asia (ex- Japan) 1.5 2.0 1.5 1.0 1.0 0.5 over the medium term. 0.5 0.0 Figure 5.1 GDP growth (annual average) 0.0 Australia -0.5 -1.0 % % 5 Projection 5 -1.0 Other advanced economies -1.5 -2.0 -0.5 2006 2008 2010 2012 -1.5 2014 2016 -2.0 Source: Haver Analytics, RBNZ estimates. Note: Asia ex-Japan includes China, Hong Kong, India, Indonesia, Malaysia, Singapore, South Korea, Taiwan, Thailand and the Philippines. Other advanced economies include the United Kingdom, the United States, Canada, Japan and the euro area. 4 4 3 3 2 2 1 1 0 0 −1 −1 annual pace of about 7 percent, somewhat slower than −2 −2 in recent years. Similarly, many emerging and newly −3 industrialised Asian economies are forecast to grow at −3 2007 2009 2011 2013 Source: Statistics New Zealand, RBNZ estimates. 2015 Growth in China is expected to continue at an a moderate pace by past standards. While the boost to demand from investment growth in China is likely to ease, its exports and those of many other Asian economies External demand should continue to rise as major advanced economies Economic growth in New Zealand’s main trading recover. partners is expected to continue recovering over the Economic growth in Australia is expected to projection (figure 5.2). Highly accommodative monetary remain below average in 2014 as investment in the policy and slowing fiscal consolidation are expected to resource sector declines from high levels. Low interest continue supporting growth in developed economies. rates should continue to support the non-resource sectors Growth in the United States is expected to reach an of the economy, and resource exports are expected annual pace of around 3 percent, as the housing market to increase rapidly in coming years. As a result, annual and labour market continue to recover. The euro area is economic growth is expected to increase to around 3 also expected to continue to grow, but at a more modest percent in 2015. annual pace of around 1 percent. Rising demand in New Zealand’s trading partners, and particularly China, will result in continued growth in demand for New Zealand’s exports over the projection. Export prices are expected to remain high relative to history, though ease by about 3 percent over the next year due to an assumed moderation in global dairy prices. 20 Reserve Bank of New Zealand: Monetary Policy Statement, March 2014 Substantial excess capacity in developed Domestic demand economies will be absorbed only gradually by growing Strong construction activity is expected to remain demand, and low inflation in New Zealand’s import prices a key influence on economic conditions. Construction should continue. Inflation in the US and euro area declined output is expected to increase as a share of the economy over 2013 and is expected to remain weak. In Australia over the next year before stabilising at about 10.5 and in Asian trading partners also, inflation is likely to percent of potential GDP – a similar share as in the mid- remain low. Overall, CPI inflation in a group of New 2000s (figure 5.4). The profile of reconstruction work in Zealand’s major trading partners is expected to average Canterbury is expected to be prolonged, increasing further below 2 percent over the forecast horizon. Combining the over the next year before flattening as a share of GDP for outlooks for import and export prices, the terms of trade a few years thereafter. are projected to ease by around 4 percent over the next year, and then settle at a level about 10 percent above the average of the past decade. The New Zealand dollar is assumed to remain elevated over the projection, depreciating only gradually. The elevated New Zealand dollar partly reflects New Figure 5.4 Construction expenditure (quarterly, seasonally adjusted, share of potential GDP) % % Zealand’s favourable growth outlook relative to our trading 12 partners and the persistently high terms of trade (figure 11 11 5.3). Revisions to GDP data released in December showed 10 10 9 9 8 8 the exchange rate’s high level than previously thought. 7 7 Nonetheless, the high exchange rate is expected to 6 2000 that the terms of trade and net export volumes have both been higher over history than previously thought. Past external sector performance can now explain more of remain a drag on economic output over the projection. Figure 5.3 SNA terms of trade and New Zealand dollar TWI Index Index 85 Projection 1.35 80 1.30 75 1.25 70 2006 2009 2012 2015 6 Source: Statistics New Zealand, RBNZ estimates. Note: Construction expenditure sums gross fixed capital formation of residential buildings, non-residential building and other construction (from quarterly expenditure GDP). Residential investment outside Canterbury is expected to continue increasing gradually over the projection, and to be concentrated in Auckland where supply shortages are acute. The pace of building in Terms of Trade (RHS) 45 1993 1996 1999 2002 2005 2008 2011 2014 Source: Statistics New Zealand, RBNZ estimates. 1.20 Auckland will be supported by the Auckland Housing Accord, which fast-tracks the consent process in “Special 1.10 60 50 2003 12 1.15 TWI 65 55 Projection Housing Areas” in Auckland. 1.05 1.00 Following the strong increases over the past 18 0.95 months, net immigration is expected to ease gradually 0.90 over coming years (figure 5.5, overleaf), as economic conditions in other economies, particularly in Australia, improve. Though easing, net immigration will continue to add to demand over the projection, including for housing, and make some contribution to labour requirements for Reserve Bank of New Zealand: Monetary Policy Statement, March 2014 21 the Canterbury rebuild. The increased supply of labour as a result of net immigration contributes to stronger potential growth in the economy. % Figure 5.5 Working-age permanent and long-term migration (annual total) 000s 60 Net (RHS) 40 2000 Source: Statistics New Zealand, RBNZ estimates. 2003 2006 2009 2012 2015 0 −15 0 −1 −1 −2 −2 −3 15 1 0 70 2 1 45 3 2 30 Departures 4 3 Arrivals 50 5 Projection 4 Projection 80 % 5 000s 90 Figure 5.6 House price inflation (quarterly, seasonally adjusted) −3 −4 −4 −5 Source: Property IQ, RBNZ estimates. 2006 2008 2010 2012 2014 2016 Figure 5.7 Unemployment rate (seasonally adjusted) % % 7.5 Low mortgage interest rates and strong demand −5 Projection 7.0 7.5 7.0 6.5 6.5 6.0 6.0 price inflation. However, several factors should cause 5.5 5.5 house price inflation to moderate in coming years (figure 5.0 5.0 4.5 4.5 4.0 4.0 price inflation over 2014. Rising interest rates, a projected 3.5 3.5 easing in migration flows, and the increase in housing 3.0 for housing, particularly in Auckland, are supporting house 5.6). LVR restrictions are expected to dampen house supply should reduce the imbalances in the housing market and moderate price pressures. 2007 2009 2011 2013 Source: Statistics New Zealand, RBNZ estimates. 2015 3.0 Strengthening economic activity will underpin National income is boosted substantially by the continued growth in employment. The unemployment high terms of trade over the projection (figure 5.8). Along rate is projected to decline to around 5 percent in 2015 with the recovery in the labour market, this supports (figure 5.7). Underlying this projection is the assumption moderate growth in labour incomes that contributes to real that labour force participation remains around its current household consumption growing at about 3.5 percent per high level. annum over the next two years (figure 5.9). Stimulatory interest rates and continued gains in real house prices support rising household spending, and low import price inflation increases households’ purchasing power. 22 Reserve Bank of New Zealand: Monetary Policy Statement, March 2014 Figure 5.8 GDP and real gross national disposable income growth (RGNDI) (annual average) Figure 5.10 Household saving rate (March years, share of disposable income) % % 4 % 8 7 6 5 4 3 2 GDP 1 0 −1 −2 −3 2000 2003 % Projection 8 RGNDI Source: Statistics New Zealand, RBNZ estimates. 2006 2009 2012 2015 7 6 5 4 3 2 1 0 −1 −2 −3 4 2 2 0 0 −2 −2 −4 −4 −6 −6 −8 −8 −10 2000 Source: Statistics New Zealand, RBNZ estimates. 2003 2006 2009 2012 2015 −10 Business investment is expected to continue Figure 5.9 Private consumption growth (annual) increasing in line with economic output over the projection (figure 5.11), in response to growing demand and pressure on productive resources. The high exchange rate and low % % 6 Projection Projection 6 prices for imported capital equipment over recent years have helped business investment to increase substantially 4 4 as a share of real GDP, even as the upswing in nominal 2 2 spending has been more gradual. 0 0 −2 −2 −4 −4 −6 2007 2009 2011 2013 Source: Statistics New Zealand, RBNZ estimates. 2015 −6 Consumption growth eases over the latter part of the projection as income growth moderates and interest rates rise, but does not fall to the same degree as income growth. The result is that housholds dissave, although the deterioration in their saving rate is expected to be much less than in the mid-2000s (figure 5.10). Figure 5.11 Business investment (quarterly, seasonally adjusted, share of GDP) 22 % % Projection 22 20 20 18 Real 18 16 16 14 14 Nominal 12 10 2000 12 Source: Statistics New Zealand, RBNZ estimates. Reserve Bank of New Zealand: Monetary Policy Statement, March 2014 2003 2006 2009 2012 2015 10 23 Consistent with the Half Year Economic and Fiscal Update 2013, continued fiscal consolidation is assumed to dampen gross national expenditure by 2.4 percent between 2014 and 2017. The projected operating surplus Figure 5.12 Output gap (seasonally adjusted, share of potential GDP) % % and subsequent reduction in debt are to be achieved 5 through limited growth in new government expenditure 4 4 3 3 2 2 1 1 and stronger growth in revenue – partly due to increases in indirect taxes that boost headline inflation. Economic output is further dampened over the Projection 5 0 0 projection by the elevated New Zealand dollar, which −1 −1 weighs on incomes and competitiveness in the tradables −2 −2 sector. Combined with growing household and business −3 2000 spending, the high exchange rate contributes to rising import penetration over the projection while export Source: RBNZ estimates. 2003 2006 2009 2012 2015 −3 Figure 5.13 90-day interest rate volumes remain flat as a share of the economy. % Capacity pressures and inflation % 10 While CPI inflation is currently below 2 percent, demand pressure suggests that inflation will increase. Strong demand growth over the coming years is expected to result in a tightening in the labour market and increasing Projection 10 9 9 8 8 7 7 6 6 5 5 pressure on physical capital. The output gap is projected 4 4 to increase over the next year to around 1.5 percent 3 3 of potential GDP (figure 5.12), resulting in building 2 inflationary pressures. Those pressures are expected to be most pronounced in the construction sector. The output gap moderates over the second half of the projection, partly reflecting easing demand pressures associated with the declining terms of trade, net immigration flows and Source: RBNZ estimates. 2006 2008 2010 2012 2014 Within that forecast, the 90-day rate increases (figure 5.13) to offset inflationary pressures so that CPI 2 Figure 5.14 Annual CPI inflation and components % % 7 house price inflation. 2016 Projection 6 Non− tradables 5 4 7 6 5 4 inflation settles around 2 percent (figure 5.14). Underlying 3 the 2 2 1 1 headline inflation rate, non-tradables inflation increases to about 4 percent, reflecting the degree of Headline 0 domestic capacity pressure. Tradables inflation remains negative for much of the projection, due to the high New 0 −1 −2 Zealand dollar and low imported inflation, but increases very gradually. 24 3 Tradables −1 Source: Statistics New Zealand, RBNZ estimates. 2007 2009 2011 2013 2015 −2 Reserve Bank of New Zealand: Monetary Policy Statement, March 2014 Appendix A1 Summary tables Table A Projections of GDP growth, CPI inflation and monetary conditions (CPI and GDP are percent changes, GDP seasonally adjusted) GDP Quarterly 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 1 Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar CPI Quarterly CPI Annual TWI 90-day bank bill rate 1.3 0.7 0.4 1.0 1.2 0.8 0.7 0.1 -0.4 -1.2 -0.2 -0.6 -1.0 -0.2 0.6 1.5 0.2 1.0 -0.3 -0.5 0.9 0.8 0.9 0.7 0.9 0.2 0.2 1.3 0.5 0.3 1.4 0.8 0.8 0.9 0.9 0.7 0.6 0.5 0.5 0.6 0.6 0.6 0.6 0.5 0.5 0.6 1.5 0.7 -0.2 0.5 1.0 0.5 1.2 0.7 1.6 1.5 -0.5 0.3 0.6 1.3 -0.2 0.4 0.2 1.1 2.3 0.8 1.0 0.4 -0.3 0.5 0.3 0.3 -0.2 0.4 0.2 0.9 0.1 0.5 0.5 0.8 0.1 0.6 0.5 0.8 0.2 0.6 0.6 0.7 0.2 0.6 3.3 4.0 3.5 2.6 2.5 2.0 1.8 3.2 3.4 4.0 5.1 3.4 3.0 1.9 1.7 2.0 2.0 1.7 1.5 4.0 4.5 5.3 4.6 1.8 1.6 1.0 0.8 0.9 0.9 0.7 1.4 1.6 1.7 2.0 1.9 1.9 1.9 1.9 2.0 2.1 2.1 2.1 2.0 2.0 2.1 68.2 62.8 63.6 67.0 68.8 72.0 71.4 71.0 71.9 69.3 65.5 57.8 53.7 58.4 62.6 65.5 65.3 66.8 66.9 67.8 67.1 69.1 72.0 68.7 72.5 71.2 72.6 73.6 75.9 76.5 75.2 77.3 78.4 78.4 78.3 78.3 78.0 77.9 77.6 77.1 76.6 76.2 75.8 75.5 75.3 7.5 7.5 7.5 7.6 7.8 8.1 8.7 8.8 8.8 8.8 8.2 6.3 3.7 2.9 2.8 2.8 2.7 2.9 3.2 3.2 3.0 2.7 2.8 2.7 2.7 2.6 2.7 2.6 2.7 2.6 2.6 2.7 2.8 3.3 3.7 4.0 4.3 4.5 4.7 4.8 4.9 5.0 5.1 5.2 5.3 Notes for these tables follow on pages 29 and 30. Reserve Bank of New Zealand: Monetary Policy Statement, March 2014 25 26 Jun 1.0 Inflation (annual rates) Table B Measures of inflation, inflationary pressures and asset prices Reserve Bank of New Zealand: Monetary Policy Statement, March 2014 1.6 1.2 1.8 1.3 1.9 0.5 CPI tradables Sectoral factor model estimate of core inflation CPI trimmed mean (of annual price change) CPI weighted median (of annual price change) GDP deflator (derived from expenditure data) PPI - Input prices PPI - Output prices 2.0 -1.1 CPI non-tradables 2.2 2.5 ANZ Bank Business Outlook - inflation one-year-ahead (quarterly average to date) AON Hewitt Economist Survey - inflation one-year-ahead AON Hewitt Economist Survey - inflation four-years-ahead 20.0 2.7 RBNZ survey of expectations - inflation two-years-ahead QSBO Average costs, past three months (economy wide) 4.2 24.0 QSBO Average selling prices, next three months (economy wide) -1.6 -0.3 Quarterly House Price Index (Quotable Value Limited) REINZ Farm Price Index (quarterly average to date) NZX 50 (quarterly average to date) Asset prices (annual percentage changes) 9.9 ANZ Bank Business Outlook - Pricing intentions, next 3 months (quarterly average to date) Pricing and costs (net balances) 2.4 RBNZ survey of expectations - inflation one-year-ahead Inflation expectations 2.4 CPI 8.4 -1.6 4.8 24.8 13.2 17.2 2.5 2.0 2.6 2.3 2.0 -0.6 0.3 -1.2 2.0 1.1 1.5 -1.2 2.3 0.8 Sep 2012 21.0 3.8 6.8 20.9 8.7 16.0 2.4 2.0 2.4 2.3 1.8 -0.8 -0.5 -2.3 1.6 1.0 1.5 -1.0 2.5 0.9 Dec 26.9 -6.5 7.7 16.1 10.6 16.0 2.4 1.9 2.2 2.2 1.7 0.1 0.0 0.3 1.5 1.0 1.5 -1.1 2.4 0.9 Mar 28.9 -1.8 9.1 25.6 22.3 20.3 2.3 1.8 2.3 2.1 1.5 0.8 0.0 0.1 1.3 0.8 1.5 -1.6 2.5 0.7 Jun 2013 26.7 10.8 9.6 21.8 24.0 25.2 2.3 2.0 2.3 2.4 1.9 4.1 3.3 3.1 1.8 1.4 1.6 -0.5 2.8 1.4 Sep 20.6 4.4 22.2 23.3 26.9 2.3 2.0 2.3 2.3 1.9 3.8 2.8 2.0 1.6 1.6 -0.3 2.9 1.6 Dec 15.7 27.9 2.4 2.3 2.0 Mar 2014 Table C 27 1 -2.1 2.6 3.6 Public authority 0.1 Gross national expenditure 2.8 3.4 GDP (production) GDP (production, March qtr to March qtr) Percentage point contribution to the growth rate of GDP. 1.8 -1.6 Imports of goods and services Expenditure on GDP 3.8 Exports of goods and services 1.3 2.9 3.5 10.8 3.7 6.0 1.1 -1.1 1 Stockbuilding 4.8 1.2 Final domestic expenditure 7.4 8.8 -2.7 Other 1.8 4.0 4.8 3.7 2008 Total -2.9 Residential Gross fixed capital formation Total 2.3 2007 Private Final consumption expenditure March year -3.0 -1.9 -1.9 -4.0 -2.7 -2.4 -0.5 -2.2 -7.8 -4.6 -21.3 -0.3 4.5 -1.6 2009 2.1 -0.1 2.2 -8.9 4.0 -2.2 -1.1 -1.3 -9.5 -9.7 -8.6 1.2 -0.0 1.6 2010 Actuals (annual average percent change, seasonally adjusted, unless specified otherwise) Composition of real GDP growth Reserve Bank of New Zealand: Monetary Policy Statement, March 2014 1.2 1.8 0.7 11.4 2.9 3.4 1.1 2.2 1.8 2.1 0.3 2.3 2.0 2.4 2011 3.2 2.4 2.3 6.6 2.8 3.7 0.5 2.8 4.3 5.2 -0.5 2.4 0.2 3.1 2012 2.1 2.3 2.6 1.2 2.6 2.1 -0.4 3.0 7.2 5.0 19.2 1.8 -0.6 2.5 2013 3.3 3.0 2.8 7.7 0.0 5.5 0.1 5.1 12.1 11.3 16.1 3.0 1.4 3.4 2014 3.2 3.5 3.5 6.3 2.6 4.7 0.1 4.6 10.0 8.1 19.0 2.9 0.5 3.6 2015 2.2 2.4 2.4 5.3 2.4 3.5 0.1 3.5 5.2 4.2 9.7 2.8 0.6 3.4 2016 Projections 2.2 2.3 2.3 3.3 3.0 2.5 -0.0 2.5 3.1 3.2 2.9 2.3 0.5 2.7 2017 28 Reserve Bank of New Zealand: Monetary Policy Statement, March 2014 2.5 2007 0.6 Export prices (in New Zealand dollars) Import prices (in New Zealand dollars) 7.6 2.3 Labour costs 2.8 TWI (year average) Output gap (% of potential GDP, year average) 2.0 2.7 Potential output (annual average % change) Trend labour productivity 3.4 1.1 Unemployment rate (March qtr, seasonally adjusted) -4.5 Terms of trade (SNA measure, annual average % change) Household saving rate (% of disposable income) 3.8 -1.6 Current account balance (% of GDP) 1.9 Trading partner GDP (annual average % change) Trading partner CPI (TWI weighted, annual % change) World economy -6.9 Government operating balance (% of GDP, year to June) Key balances 3.9 Total employment (seasonally adjusted) Labour market 2.6 GDP (production, annual average % change) Output 65.6 90-day rate (year average) Monetary conditions 3.0 CPI Price measures March year Table D Summary of economic projections (annual percent change, unless specified otherwise) 3.3 4.2 -1.7 8.8 -6.8 3.1 1.0 3.8 1.3 3.4 2.2 2.9 71.6 8.6 0.1 11.5 3.5 3.4 2008 0.9 0.2 -1.9 -2.4 -7.1 -2.1 0.9 5.2 -0.9 -0.3 1.7 -1.9 61.6 6.7 17.6 7.2 3.1 3.0 2009 1.7 1.1 0.2 -4.1 -1.5 -3.3 0.9 6.2 -0.2 -1.7 1.3 -0.1 62.9 2.8 -11.2 -7.5 1.3 2.0 2010 Actuals 2.2 4.4 1.0 7.7 -2.8 -9.2 0.9 6.7 1.8 -1.1 1.3 1.8 67.1 3.1 3.5 7.9 2.0 4.5 2011 2.2 3.5 0.4 1.5 -3.1 -4.5 1.0 6.8 0.9 -0.3 1.5 2.4 70.6 2.7 -1.8 -3.2 2.1 1.6 2012 1.6 3.2 -0.7 -4.2 -3.9 -2.1 1.0 6.2 0.4 0.0 2.1 2.3 73.3 2.6 -4.3 -5.3 1.8 0.9 2013 1.6 3.5 0.5 8.9 -3.2 -1.0 1.0 5.6 3.5 0.6 2.4 3.0 76.9 2.7 -2.6 7.9 1.8 1.7 2014 2.0 3.8 0.2 1.6 -3.7 0.2 1.1 4.9 2.1 1.4 2.6 3.5 78.3 3.8 0.3 -2.7 2.1 1.9 2015 1.9 4.2 -1.2 -1.8 -5.2 0.8 1.1 4.9 0.9 1.1 2.8 2.4 77.3 4.7 2.2 1.0 2.3 2.1 2016 Projections 1.9 4.2 -1.8 -0.2 -5.6 1.6 1.2 5.0 0.8 0.6 2.8 2.3 75.7 5.2 2.7 2.5 2.3 2.1 2017 Notes to the tables CPI Consumers Price Index. Weighted median inflation To calculate weighted median inflation, first the percentage changes in all components of the CPI are ranked. The weighted median is the rate of price change that half of all weighted price movements are below, and half are above. Trimmed mean inflation To calculate trimmed mean inflation, first percentage changes in all components of the CPI are ranked, then the price changes for a specified weight of the CPI are removed. The trimmed mean is the average of the remaining price changes. Sectoral factor model estimate of core inflation Estimates core inflation by up weighting those components of the CPI that most closely reflect the general trend in the CPI inflation and down weighting those that do not. The weightings evolve over time as the volatility of each component changes. TWI Nominal trade-weighted index of the exchange rate. Defined as a geometricallyweighted index of the New Zealand dollar bilateral exchange rates against the currencies of Australia, Japan, the United States, the United Kingdom and the euro area. 90-day bank bill rate The interest yield on 90-day bank bills. World GDP RBNZ definition. 16-country index, export weighted. Seasonally adjusted. World CPI inflation RBNZ definition. Five-country index, TWI weighted. Import prices                     Domestic currency import prices. System of National Accounts. Export prices                     Domestic currency export prices. System of National Accounts. Terms of trade                                                                  Constructed using domestic currency export and import prices. System of National Accounts Private consumption System of National Accounts. Public authority consumption System of National Accounts. Residential investment RBNZ definition. Private sector and government market sector residential investment. System of National Accounts. Other investment RBNZ definition. Total investment - residential investment. Final domestic expenditure RBNZ definition. The sum of total consumption and total investment. System of National Accounts. Stockbuilding Percentage point contribution to the growth of GDP by stocks. System of National Accounts. Gross Domestic Income The real purchasing power of domestic income, taking into account changes in the terms of trade. System of National Accounts. Gross national expenditure Final domestic expenditure plus stocks. System of National Accounts. Exports of goods and services System of National Accounts. Imports of goods and services System of National Accounts. GDP (production) Gross Domestic Product. System of National Accounts. Potential output RBNZ definition and estimate. Output gap RBNZ definition and estimate. The percentage difference between real GDP (production, seasonally adjusted) and potential output GDP. Current account balance Balance of Payments. Total employment Household Labour Force Survey. Reserve Bank of New Zealand: Monetary Policy Statement, March 2014 29 Unemployment rate Household Labour Force Survey. Household saving rate Household Income and Outlay Account. Government operating balance Operating balance before gains and losses. Source: The Treasury, adjusted by the Reserve Bank. Labour productivity The series shown is the annual percentage change in a trend measure of labour productivity. Labour productivity is defined as GDP (production) divided by Household Labour Force Survey hours worked. Labour cost Private sector all salary and wage rates. Labour Cost Index. Quarterly percent change (Quarter/Quarter-1 - 1)*100 Annual percent change (Quarter/Quarter-4 - 1)*100 Annual average percent change (Year/Year-1 - 1)*100 Source: Unless otherwise specified, all data conform to Statistics New Zealand definitions, and are not seasonally adjusted. Rounding: All projections data are rounded to one decimal place. 30 Reserve Bank of New Zealand: Monetary Policy Statement, March 2014 Appendix B Companies and organisations contacted by Reserve Bank staff during the projection round Ballantynes Ltd KPMG Canterbury Development Corporation Mainfreight Ltd Canterbury Earthquake Recovery Authority Meat Industry Association of New Zealand (Inc) Carter Group Ltd Ministry of Business Innovation and Employment Christchurch Central Development Unit Motim Technologies Ltd Christchurch City Council NZ Manufacturers and Exporters Association Council of Trade Unions New Zealand Retailers Association Incorporated Employers & Manufacturers Association (EMA) Inc. NZ Transport Agency Ezibuy Limited Opus International Consultants Limited Fletcher Construction Company Ltd Ports of Auckland Limited Fulton Hogan Ltd Smith City Group Ltd Global Culture Group Ltd Snowy Peak Ltd Hawkins Group Ltd Tait Ltd Tax Management NZ Reserve Bank of New Zealand: Monetary Policy Statement, March 2014 31 Appendix C The Official Cash Rate chronology Date Percentage Date Percentage 17 March 1999 4.50 29 January 2004 21 April 1999 4.50 11 March 2004 5.25 19 May 1999 4.50 29 April 2004 5.50 30 June 1999 4.50 10 June 2004 5.75 18 August 1999 4.50 29 July 2004 6.00 29 September 1999 4.50 9 September 2004 6.25 17 November 1999 5.00 28 October 2004 6.50 19 January 2000 5.25 9 December 2004 6.50 15 March 2000 5.75 27 January 2005 6.50 19 April 2000 6.00 10 March 2005 6.75 17 May 2000 6.50 28 April 2005 6.75 5 July 2000 6.50 9 June 2005 6.75 16 August 2000 6.50 28 July 2005 6.75 4 October 2000 6.50 15 September 2005 6.75 6 December 2000 6.50 27 October 2005 7.00 24 January 2001 6.50 8 December 2005 7.25 14 March 2001 6.25 26 January 2006 7.25 19 April 2001 6.00 9 March 2006 7.25 16 May 2001 5.75 27 April 2006 7.25 4 July 2001 5.75 8 June 2006 7.25 15 August 2001 5.75 27 July 2006 7.25 19 September 2001 5.25 14 September 2006 7.25 3 October 2001 5.25 26 October 2006 7.25 14 November 2001 4.75 7 December 2006 7.25 23 January 2002 4.75 25 January 2007 7.25 20 March 2002 5.00 8 March 2007 7.50 17 April 2002 5.25 26 April 2007 7.75 15 May 2002 5.50 7 June 2007 8.00 3 July 2002 5.75 26 July 2007 8.25 14 August 2002 5.75 13 September 2007 8.25 2 October 2002 5.75 25 October 2007 8.25 20 November 2002 5.75 6 December 2007 8.25 23 January 2003 5.75 24 January 2008 8.25 6 March 2003 5.75 6 March 2008 8.25 24 April 2003 5.50 24 April 2008 8.25 5 June 2003 5.25 5 June 2008 8.25 24 July 2003 5.00 24 July 2008 8.00 4 September 2003 5.00 11 September 2008 7.50 23 October 2003 5.00 23 October 2008 6.50 5.00 4 December 2008 5.00 4 December 2003 32 5.25 Reserve Bank of New Zealand: Monetary Policy Statement, March 2014 Date Percentage Date Percentage 29 January 2009 3.50 15 September 2011 2.50 12 March 2009 3.00 27 October 2011 2.50 30 April 2009 2.50 8 December 2011 2.50 11 June 2009 2.50 26 January 2012 2.50 30 July 2009 2.50 8 March 2012 2.50 10 September 2009 2.50 26 April 2012 2.50 29 October 2009 2.50 14 June 2012 2.50 10 December 2009 2.50 26 July 2012 2.50 28 January 2010 2.50 13 September 2012 2.50 11 March 2010 2.50 25 October 2012 2.50 29 April 2010 2.50 6 December 2012 2.50 10 June 2010 2.75 31 January 2013 2.50 29 July 2010 3.00 14 March 2013 2.50 16 September 2010 3.00 24 April 2013 2.50 28 October 2010 3.00 13 June 2013 2.50 9 December 2010 3.00 25 July 2013 2.50 27 January 2011 3.00 12 September 2013 2.50 10 March 2011 2.50 31 October 2013 2.50 28 April 2011 2.50 12 December 2013 2.50 9 June 2011 2.50 30 January 2014 2.50 28 July 2011 2.50 Reserve Bank of New Zealand: Monetary Policy Statement, March 2014 33 Appendix D Upcoming Reserve Bank Monetary Policy Statements and Official Cash Rate release dates The following is the Reserve Bank’s schedule for the release of Monetary Policy Statements and Official Cash Rate (OCR) announcements. Please note that the Reserve Bank reserves the right to make changes, if required due to unexpected developments. In that unlikely event, the markets and the media would be given as much warning as possible. Announcements are made at 9.00am on the day concerned and are posted to the website shortly after. 2014 24 April 2014 OCR announcement 12 June 2014 Monetary Policy Statement and OCR announcement (media conference and webcast) 24 July 2014 OCR announcement 11 September 2014 Monetary Policy Statement and OCR announcement (media conference and webcast) 30 October 2014 OCR announcement 11 December 2014 Monetary Policy Statement and OCR announcement (media conference and webcast) 2015 29 January 2015 OCR announcement 12 March 2015 Monetary Policy Statement and OCR announcement (media conference and webcast) 30 April 2015 OCR announcement 11 June 2015 Monetary Policy Statement and OCR announcement (media conference and webcast) 34 Reserve Bank of New Zealand: Monetary Policy Statement, March 2014 Appendix E Policy Targets Agreement This agreement between the Minister of Finance and the Governor of the Reserve Bank of New Zealand (the Bank) is made under section 9 of the Reserve Bank of New Zealand Act 1989 (the Act). The Minister and the Governor agree as follows: 1. a) Price stability Under Section 8 of the Act the Reserve Bank is required to conduct monetary policy with the goal of maintaining a stable general level of prices. b) The Government’s economic objective is to promote a growing, open and competitive economy as the best means of delivering permanently higher incomes and living standards for New Zealanders. Price stability plays an important part in supporting this objective. 2. a) Policy target In pursuing the objective of a stable general level of prices, the Bank shall monitor prices, including asset prices, as measured by a range of price indices. The price stability target will be defined in terms of the All Groups Consumers Price Index (CPI), as published by Statistics New Zealand. b) For the purpose of this agreement, the policy target shall be to keep future CPI inflation outcomes between 1 per cent and 3 per cent on average over the medium term, with a focus on keeping future average inflation near the 2 per cent target midpoint. 3. a) Inflation variations around target For a variety of reasons, the actual annual rate of CPI inflation will vary around the medium-term trend of inflation, which is the focus of the policy target. Amongst these reasons, there is a range of events whose impact would normally be temporary. Such events include, for example, shifts in the aggregate price level as a result of exceptional movements in the prices of commodities traded in world markets, changes in indirect taxes, significant government policy changes that directly affect prices, or a natural disaster affecting a major part of the economy. b) When disturbances of the kind described in clause 3(a) arise, the Bank will respond consistent with meeting its medium-term target. Reserve Bank of New Zealand: Monetary Policy Statement, March 2014 35 4. a) Communication, implementation and accountability On occasions when the annual rate of inflation is outside the medium-term target range, or when such occasions are projected, the Bank shall explain in Policy Statements made under section 15 of the Act why such outcomes have occurred, or are projected to occur, and what measures it has taken, or proposes to take, to ensure that inflation outcomes remain consistent with the medium-term target. b) In pursuing its price stability objective, the Bank shall implement monetary policy in a sustainable, consistent and transparent manner, have regard to the efficiency and soundness of the financial system, and seek to avoid unnecessary instability in output, interest rates and the exchange rate. c) 36 The Bank shall be fully accountable for its judgements and actions in implementing monetary policy. Reserve Bank of New Zealand: Monetary Policy Statement, March 2014