Monetary Policy Statement September 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 17 A. Summary tables 23 B. Companies and organisations contacted by RBNZ staff during the projection round 29 C. The Official Cash Rate chronology 30 D. Upcoming Reserve Bank Monetary Policy Statements and Official Cash Rate release dates 32 E. Policy Targets Agreement 33 Appendices This document is also available on www.rbnz.govt.nz ISSN 1770-4829 1 Projections finalised on 28 August 2014. Policy assessment finalised on 10 September 2014. Reserve Bank of New Zealand: Monetary Policy Statement, September 2014 1 1 Policy assessment The Reserve Bank today left the Official Cash Rate unchanged at 3.5 percent. New Zealand’s economy is expected to grow at an annual pace of 3.7 percent over 2014. Global financial conditions remain very accommodative and are reflected in low interest rates, narrow risk spreads, and low volatility across a range of asset markets. Accommodative financial conditions are supporting a moderate rate of global growth, albeit uneven across regions. New Zealand’s economic growth continues to be supported by increasing construction activity and ongoing strength in consumption and business investment. A high level of net immigration is adding to domestic demand as well as productive capacity. Economic growth is projected to moderate in response to recent commodity price declines and the impact of policy tightening. The high exchange rate continues to restrain growth in the traded sectors. The exchange rate has yet to adjust materially to the lower commodity prices. Its current level remains unjustified and unsustainable. We expect a further significant depreciation, which should be reinforced as monetary policy in the US begins to normalise. The economy appears to be adjusting to the policy measures taken by the Bank over the past year. House price inflation continues to ease, despite strong net immigration. CPI inflation remains moderate, reflecting subdued wage increases, well-anchored inflation expectations, weak global inflation, and the high New Zealand dollar. However, spare capacity is being absorbed, and annual non-tradables inflation is expected to increase. Risks also remain around how strongly net immigration will affect housing demand, and the extent to which pressures in the construction sector will impact broader inflation. In light of these uncertainties, and in order to better assess the moderating effects of the recent policy tightening and export price reductions, it is prudent to undertake a period of monitoring and assessment before considering further policy adjustment. Nevertheless, we expect some further policy tightening will be necessary to keep future average inflation near the 2 percent target mid-point and ensure that the economic expansion can be sustained. Graeme Wheeler Governor 2 Reserve Bank of New Zealand: Monetary Policy Statement, September 2014 2 Key policy judgements Growth in the New Zealand economy has picked has moderated. Prices for dairy and forestry exports up over the past 18 months, and is estimated to be have fallen sharply over the year, slightly further than 3.7 percent in the year to September. Growth in output anticipated in the June Statement. The exchange rate has been exceeding that in supply capacity for some remains high and is a drag on growth. Looking abroad, time (figure 2.1), and inflationary pressures have been economic growth is uneven across advanced economies, increasing. Nonetheless, we project growth to slow to a and in aggregate is picking up only gradually. Combined more sustainable pace over the next few years, keeping with low global inflation, this outlook means monetary annual CPI inflation contained near the 2 percent target policy in the major advanced economies is likely to remain midpoint. supportive for some time to come. In October 2013, in response to financial stability Figure 2.1 GDP and estimated potential output growth (annual, dashed lines represent forecasts) % 7 6 5 4 3 Potential 2 1 0 −1 Actual −2 −3 −4 2000 2003 2006 2009 Source: Statistics New Zealand, RBNZ estimates. % 2012 7 6 5 4 3 2 1 0 −1 −2 −3 −4 risks associated with high house price inflation, the Bank introduced speed limits on high loan-to-value ratio (LVR) mortgage lending, and these have contributed to the slowing in house price inflation. From March to July 2014, with demand and inflationary pressures increasing, the Bank increased the Official Cash Rate (OCR) by 100 basis points. There are signs that the OCR increases are starting to have the desired effect of slowing growth in demand to a more sustainable rate, and keeping inflation and inflation expectations well anchored. However, it typically takes 18 to 24 months for monetary policy to have its full effects, and the transmission of monetary policy to output and inflation can be quite variable from one There have been several key drivers of the pick- business cycle to the next. It is therefore prudent to take up in growth over the past 18 months. Reconstruction time to assess how recent policy changes are passing work continued to accelerate in Canterbury, and building through the economy and examine how the economy is work in Auckland and other regions has increased more responding to a range of other factors. In particular, we are recently. High house price inflation continued to support paying close attention to: growth in household demand. Net immigration flows rose • changes and increasing net immigration; from near zero over 2012 to an annual rate of 41,000 people in the year to July 2014. Prices for New Zealand’s • how capacity pressures are driving domestic inflation; commodity exports rose to record highs through 2013, boosting national income substantially. Throughout the how the housing market is responding to policy • how businesses and households form inflation period since the global financial crisis, low interest rates expectations and set prices in the current low- have been supporting the recovery in domestic demand. inflation environment; and Some of these factors will continue to be important over the next two years. Construction output is growing • how the exchange rate is responding to the fall in export prices. rapidly this year, and is expected to settle at a high level. Net immigration has continued increasing strongly over the year to date. However, house price inflation Reserve Bank of New Zealand: Monetary Policy Statement, September 2014 3 The housing market and domestic demand as the OCR and floating rates rise. Falling global interest rates are putting downward pressure on longer-term New Annual house price inflation began increasing Zealand wholesale rates, and since the June Statement in mid-2011, reaching 10 percent in September 2013. financial markets have lowered their expectations of future It has subsequently eased to 6 percent, reflecting the OCR increases. Both could influence the pricing of fixed- introduction of restrictions on high-LVR mortgage lending rate mortgages. Either a stronger flow-through from net and OCR increases. immigration or continued low fixed mortgage rates could At 6 percent, house price inflation is weaker than see house price inflation pick up over coming quarters, mortgage interest rates and strong net immigration would rather than easing as projected, contributing to stronger normally have suggested. Our projection takes a view that domestic demand and inflationary pressures. net immigration is having a more muted and more lagged effect on house prices than in past cycles. This, along Capacity pressure and domestic inflation with higher interest rates, strong construction activity that Growth in output has out-stripped that in increases housing supply, and falling net immigration, productive capacity over the past 18 months, and our is behind the expectation that house price inflation will estimates suggest the output gap has reached about 1 continue easing over the forecast horizon. percent of potential output. Domestic inflation has risen, The composition of net immigration could help especially in the construction sector. explain a smaller or slower boost to housing demand than Nonetheless, the rate of non-tradables inflation in the past. Bank research suggests that reductions in remains lower than what is suggested by the normal departures boost housing demand by less than increases influences – capacity pressure, inflation expectations and in arrivals.1 While arrivals have picked up in recent pass-through from import price inflation. Given our view months, the larger part played early in the migration cycle of capacity pressures and price setting behaviour, as well by reduced departures may still be having some effect. as interest rate rises, we expect annual non-tradables Further, a large share of the increased arrivals comprises inflation to rise gradually to around 3.5 percent over the younger working-aged people and people on temporary projection. work visas. These groups may demand less housing than One factor helping to explain the projected gradual pick-up of inflation is evidence that productive capacity is permanent arrivals or those with families. Reflecting monetary policy tightening, mortgage growing, attenuating the increase in capacity pressure. rates have risen since 2013. The two-year fixed mortgage Potential growth over 2014 is estimated to be slightly rate is up about 60 basis points on its early 2013 levels, more than 2.8 percent, 0.4 percentage points higher while the rate on floating mortgages has increased than projected in December 2013. The higher estimate by about 100 basis points since last year. Due to high of potential growth reflects growth in business investment household debt and high house prices, interest rate and a trend increase in the labour force. Net immigration increases may be having a stronger effect on household has also helped to alleviate wage inflation pressures in demand than in the past. Canterbury and the construction sector more widely. At A risk to the projection is that migration flows begin the same time, the specific demand for resources for the feeding into house price inflation with the same strength Canterbury rebuild may be distorting the measurement of as in past cycles – that is, the composition of migration will capacity pressure. This is something we will be watching only temporarily dampen the effects on housing demand. carefully over the coming months. Another is that that fixed mortgage rates remain low even Inflation expectations remain well anchored, which is helping to limit increases in actual inflation (figure 1 4 McDonald (2013) ‘Migration and the housing market’, Reserve Bank of New Zealand Analytical Notes, AN2013/10. 2.2). While some measures of expected inflation one-to- Reserve Bank of New Zealand: Monetary Policy Statement, September 2014 two years ahead picked up through 2013, the increase New Zealand’s exchange rate and the increase helped appears to reflect shorter-term cyclical movements in explain the high New Zealand dollar over that period. inflation, rather than expectations becoming un-anchored. However, dairy and forestry prices in particular have fallen The path has been much smoother for expectations of significantly this year, lowering overall commodity prices inflation at longer horizons. Reflecting low CPI and wage by 12 percent from their peak. The exchange rate has yet inflation out-turns, both the two- and seven-year-ahead to adjust materially to the lower commodity prices. measures in figure 2.2 have trended down over the past Inflation and monetary policy three years. CPI inflation has increased over the past year, but Figure 2.2 Measures of expected annual inflation % 3.2 3.0 2.6 June quarter (figure 2.3). Reflecting the high exchange % 3.2 2.8 remains modest at an annual rate of 1.6 percent in the 3.0 RBNZ − 2 year 2.4 rate and spare capacity globally, tradables sector inflation is very low. Annual non-tradables inflation is at 2.7 percent 2.8 with domestic capacity pressure rising, and is especially 2.6 strong in the construction sector. 2.4 2.2 2.2 AON − 7 year 2.0 1.8 2.0 1.8 1.6 1.6 1.4 2000 2003 2006 Source: AON-Hewitt, RBNZ. 2009 2012 1.4 Figure 2.3 CPI inflation (annual) % % 6 Projection 6 5 5 4 4 3 3 economies, is weighing on international prices of New 2 2 Zealand’s imports. At the same time, the high New 1 1 Zealand dollar exchange rate and a competitive domestic 0 Tradables inflation is expected to remain near or below zero for some time. Low global inflation, reflecting the slow absorption of spare capacity in advanced environment are slowing inflation in the domestic prices of tradable goods. Overall, we expect the pick-up in inflation to be 2006 2008 2010 2012 2014 2016 0 Source: Statistics New Zealand, RBNZ estimates. a gradual one, and have taken a view that the current At current levels interest rates are still providing degree of capacity pressure is passing into inflation less support to demand growth. It is expected that the OCR will strongly and quickly than normal. At the same time, well- need to increase towards a more neutral level for annual anchored inflation expectations and weak import price CPI inflation to settle around the 2 percent target mid-point inflation are helping to moderate the increase. and growth to continue at a sustainable pace (figure 2.4, overleaf). However, with the OCR having increased 100 The exchange rate’s response to the terms of trade basis points since the start of this year it is prudent to spend some time assessing how the economy is responding to The terms of trade rose sharply over 2013, driven higher interest rates and the collection of other forces by very high prices for New Zealand’s commodity exports. acting on it. Of particular interest at present are how the The terms of trade are generally an important driver of housing market and domestic demand are developing, Reserve Bank of New Zealand: Monetary Policy Statement, September 2014 5 how capacity pressure is passing into inflation, and how the exchange rate will respond to falling export prices. Figure 2.4 90-day interest rate % % 10 10 Projection 9 9 8 8 7 7 6 6 5 5 4 4 3 3 2 2000 2003 2006 2009 2012 2015 2 Source: RBNZ 6 Reserve Bank of New Zealand: Monetary Policy Statement, September 2014 3 Financial market developments Low volatility across a number of asset classes remains a dominant theme in global financial markets. line with the general economic improvement in emerging economies. This has contributed to continued strength in global equity Volatility has remained low across a number markets and a fall in bond yields since the June Statement. of asset classes in the past quarter, including in equity, In addition, generally stable global growth, low inflationary bond and currency markets (figure 3.1). Volatility in equity pressures, and easy global monetary policy have all been markets, as measured by the VIX index, rose slightly factors contributing to this. during July in response to geopolitical concerns, but has These international trends have flowed through to New Zealand markets, putting downward pressure on since moved back down. Volatility has remained very low across bond and currency markets. New Zealand interest rates, especially at longer maturities. With OCR increases putting upward pressure on shortterm interest rates, the yield curve has flattened. Figure 3.1 Volatility indices After the New Zealand dollar trade-weighted Index index (TWI) rose to a record high of just over 82 in early 90 July, the index fell to around 79 by the end of August. The 80 fall reflects weaker-than-expected inflation and falling 70 50 increases in the OCR. 40 quarter, reflecting the 50 basis points of OCR hikes over June and July. By contrast, fixed mortgage rates are only marginally higher, although have moved significantly higher over the past year. In response to relatively low fixed rates, borrowers continue to migrate steadily from floating- to fixed-rate mortgages. 300 250 US Treasury bonds (MOVE, RHS) 60 dairy prices, which contributed to expectations for fewer Floating mortgage rates have risen over the past Index S&P 500 (VIX) 200 150 30 100 20 50 10 G7 currencies (JPM) 0 2005 2007 Source: Bloomberg. 2009 2011 2013 0 Low market volatility is often associated with high risk appetite. A significant factor behind the subdued volatility is easy monetary policy from a number of major International market developments central banks, including asset purchases and low policy Global equity prices have continued to rise since rates. These policy settings encourage investors to shift the June Statement, extending the upward trend of the past cash into riskier asset classes in search of higher returns. five years. Concerns over an escalation in military actions There has been some concern that investors have been in Ukraine and the Middle East have to date caused only down-weighting the true riskiness of some assets, which a minor correction outside Europe. In the United States could lead to losses if volatility returns to markets. Other equity markets have performed well, with benchmark factors behind the subdued volatility and higher risk indices recording new highs supported by improving appetite include steady global growth and low inflation. economic growth after negative growth in the first quarter. These have led to higher equity prices and a compression By comparison, major equity markets in the euro area in bond spreads, including lower-credit-rated high-yield or have been softer. Behind this have been concerns that the ‘junk’ bonds. The effect on New Zealand has been to add Ukraine-Russia conflict could weigh on economic growth upward pressure on the New Zealand dollar and to lower and company earnings in Europe, while weak economic longer-term interest rates, such as government bond data have also contributed. After a soft start to the year, yields and swap rates. emerging-market equities have rebounded strongly, in Reserve Bank of New Zealand: Monetary Policy Statement, September 2014 7 With global monetary policy a dominant influence on current asset pricing, expected policy settings remain may also be undertaken either late this year or early 2015, depending on inflation outcomes. a major focus for markets. Over recent months, low price and wage inflation have caused the expected start date of Financing and credit policy rate normalisation to be pushed out in most major Global bond rates have trended lower over the economies. This has been particularly evident in the United past quarter, continuing the downward movement seen States and United Kingdom where, despite strengthening since the start of 2014 (figure 3.3). European bond yields economic growth, price pressures have remained only have shown the largest falls, with several European modest. Current market pricing places the first rate hike by governments’ 10-year bond yields hitting record lows over the Federal Reserve around the middle of 2015, while the the past month. German 10-year bond yields fell below Bank of England is expected to hike around March 2015 0.9 percent, down from around 1.4 percent at the start of (figure 3.2). Market pricing suggests the expected start of June. Spanish 10-year government bond yields have more policy tightening has also been pushed out in Australia, than halved over the past year, from above 4.5 percent to as the economy transitions away from mining investment around 2.2 percent. United States 10-year Treasury yields and growth slows. The Reserve Bank of Australia has said have continued to trend lower, reaching as low as 2.33 in numerous statements that “the most prudent course is percent in late-August after beginning the year around likely to be a period of stability in interest rates”. The next 3.0 percent. In Japan, yields are at the lowest since just policy rate hike is not expected until late 2015. after the Bank of Japan announced its large-scale asset purchases in April last year, with the 10-year rate drifting Figure 3.2 Market expectations of policy rate moves (change from current) below the 0.5 percent mark in mid-August. There are a number of reasons for the fall in global bond rates. In Europe both real and nominal bond yields have fallen, reflecting a lower growth outlook and lower % points % points 2.0 USA 1.6 1.2 UK 0.8 inflation expectations, which in turn have led to expectations 1.6 of additional policy easing by the ECB. Tensions between 1.2 Ukraine and Russia have also contributed to less appetite 0.8 Australia 0.4 EU 0.0 −0.4 2.0 Japan Jul14 Jan15 Jul15 Jan16 Jul16 0.4 for European equities, with funds instead flowing into government bonds. The reduction in German bond yields has been a major factor in the recent fall in United States 0.0 government bond yields, as bond investors are attracted −0.4 to the relatively high yields available in the United States. Source: Bloomberg. Expectations that very supportive monetary policy will continue in the United States have also supported the The situation for the European Central Bank bond market. In addition, analysis from the Federal (ECB) is slightly different, with subdued growth and Reserve has shown a fall in term premia in 2014, which inflation leading to more easing in monetary policy. ECB is linked to the low global policy rates and low volatility. President Mario Draghi announced at the September meeting that the ECB was cutting its three policy rates by 10 basis points each, including taking the deposit rate to an unprecedented -0.2 percent. A programme of assetbacked securities (ABS) purchases was also announced. Some analysts believe that government bond purchases 8 Reserve Bank of New Zealand: Monetary Policy Statement, September 2014 Figure 3.3 10-year government bond yields % % 7 7 6 6 New Zealand 5 Australia 4 $bn 5 $bn 5 4 4 4 UK 3 USA 2 1 0 5 Figure 3.4 Gross issuance of Kauris, Uridashis, and Eurokiwis (monthly) EU 2009 2011 2 1 Japan 2007 3 2013 0 Source: Reuters. The trend of lower government bond yields has flowed through to the New Zealand and Australian 3 3 Uridashi Kauri 2 2 Eurokiwi 1 0 1 2004 2007 2010 2013 0 Source: Bloomberg, Reuters, RBNZ. higher spreads then attracted institutional fund flows. markets, although Australian rates have moved more than After trending lower since mid-2012, bank New Zealand rates. From the June Statement until the end funding margins have stabilised over recent months at of August, the yield on 10-year New Zealand government an estimated 40 basis points over the OCR. Long-term bonds fell by 38 basis points to 4.07 percent. Over the wholesale rate spreads have fallen significantly since same period, yields on Australian 10-year government the Global Financial Crisis and European Sovereign bond yields fell by 53 basis points to 3.29 percent. The Debt Crisis, but have stabilised over the past few months spread between the New Zealand 10-year rate and the (figure 3.5). After contributing to falling funding costs since United States 10-year rate has narrowed slightly to around 2012, the spread to the OCR on retail term deposits has 173 basis points, while the spread to the Australian 10- flattened out this year, as deposit growth has slowed. year rate has widened from 58 to 78 basis points. Issuance of New Zealand dollar-denominated debt by overseas entities (Kauris, Eurokiwis and Uridashis) has picked up over the past quarter (figure 3.4). To the extent Figure 3.5 Marginal bank funding costs (basis points over OCR) that overseas investors have purchased these bonds, this has added upward pressure to the New Zealand dollar. Basis points Total issues have averaged NZ $1.3 billion per month in 250 2014, above the $650 million average for 2013. However, 200 this is still well below the mid-2000s average of over $2 billion per month. The increase in issuance this year has been aided by the rise in New Zealand yields compared with global yields and ongoing appetite for higher yielding fixed interest investments. Following a period of steady decline, global credit spreads stabilised over recent months, with the spread for Basis points 300 300 Long−term wholesale 150 200 150 Retail term deposits 100 50 0 Short−term wholesale −50 −100 250 100 50 0 −50 −100 2007 2008 2009 2010 2011 2012 2013 2014 Source: RBNZ estimates. investment grade credit hovering at just over 100 basis points.  The global ‘junk’ bond market recently suffered a minor setback as retail investors withdrew funds, but Reserve Bank of New Zealand: Monetary Policy Statement, September 2014 9 Foreign exchange market expected than before the June Statement. Following a The New Zealand dollar TWI hit a new post- series of weaker-than-expected data outturns, including float high in early July as investors were attracted by lower-than-expected inflation, falling dairy prices, and New Zealand’s relatively high interest rates and strong easing house price inflation, markets are pricing in an OCR economic outlook. Since then the New Zealand dollar of 3.97 percent by the end of 2015, compared with 4.20 has weakened for a number of reasons, including lower percent following the June Statement. The OIS market is market expectations for further OCR increases, partly pricing in a 16 percent chance of another 25 basis point reflecting weaker-than-expected inflation and lower dairy hike by the end of this year. Market pricing suggests the prices, and a strengthening US dollar. The NZD-USD next full 25 basis point hike is expected by April 2015. cross rate was around USD 0.8340 at the end of August, Falling global bond rates have put downward similar to where it was at the start of June but down from pressure on New Zealand interest rates at longer its peak of USD 0.8835 in July. The New Zealand dollar maturities (figure 3.7). The two-year swap rate has fallen has also weakened against the Australian dollar and the slightly since the June Statement, while the 10-year euro since July (figure 3.6). The New Zealand dollar is swap rate has moved more than 35 basis points lower. now around its lowest cross rate against the Australian Market contacts suggest swap rates have been capped by dollar for a year, more reflecting expectations of slowing overseas investors who find New Zealand rates attractive momentum in the New Zealand economy than a pick-up relative to low rates globally. Offshore bond issuance and in the Australian economy. Depreciation against the euro Kauri issuance have added further downward pressure on has been less than against the Australian dollar and US interest rates. dollar, with recent weakness in the euro area economy and expectations for further easing from the ECB resulting in the euro weakening against other major currencies. % Figure 3.6 New Zealand dollar cross rates (1 January 2014 = 100) 110 NZDEUR 108 106 106 NZDUSD 104 102 102 100 100 96 NZDAUD Jan14 Mar14 May14 30 12 Jun 2014 4.5 Index 98 40 5.0 Index 104 Basis points 5.5 110 108 Figure 3.7 Wholesale bank bill and swap rates Jul14 20 29 Aug 2014 10 4.0 0 −10 3.5 2.5 −20 Difference (RHS) 3.0 3m 6m 1y 2y 3y 4y −30 5y 7y 10y −40 Source: Bloomberg. 98 Floating mortgage rates have matched the 50 96 basis point increase in the OCR since before the June Statement. Fixed mortgage rates are in general slightly Source: Reuters. above where they were at the end of May (figure 3.8). The average two-year fixed mortgage rate from the big Other domestic financial market developments four banks is currently 5.99 percent, up slightly from 5.95 percent at the end of May. Banks increased their fixed The overnight indexed swap (OIS) market mortgage rates following the June Statement as swap suggests that a smaller total increase in the OCR is rates rose, but have since cut them again as swap rates 10 Reserve Bank of New Zealand: Monetary Policy Statement, September 2014 retreated. Competition between banks remains strong, The attractiveness of fixed mortgage rates particularly at the two-year fix point. Banks have also been compared with the higher floating rate is encouraging competing strongly offering up ‘cash-back’ offers as part of householders to fix their mortgages. The trend towards fixed mortgage rate deals. fixed rates is not new, with the proportion of mortgage While fixed mortgage rates have moved only holders on floating rates steadily declining since its peak marginally since the end of May, over the past year rates of 63.0 percent in April 2012 to 29.9 percent in July 2014. have risen more substantially. The best possible rate over The recent trend has been for borrowers to fix at all durations from the major banks has risen from a low of the longer durations of two or three years. There were 4.75 percent in September 2013 to 5.8 percent at the end about $11.3 billion of mortgage flows into the one-to-three of August 2014. This fully reflects the 100 basis points of year fixed-rate buckets in the three months to July, up from hikes in the OCR this year, much of which was anticipated only $3.9 billion over the same period a year ago. These by markets and thereby priced into the mortgage curve flows pushed up the average time to re-price mortgages long before the first OCR increase actually occurred. to 10.9 months in July, more than double the low of 4.7 months in 2012. Figure 3.8 Average mortgage rates by term and the best possible rate % % 7.0 Floating 3y 6.5 6.5 2y 6.0 5.5 6.0 5.5 1y 6m 5.0 7.0 5.0 Best possible 4.5 Jan12 Jul12 Jan13 Jul13 Jan14 4.5 Jul14 Source: interest.co.nz, RBNZ estimates Reserve Bank of New Zealand: Monetary Policy Statement, September 2014 11 4 Current economic conditions The New Zealand economy continues to grow at a robust pace, but at a slower rate than in recent quarters. This is consistent with recent declines in surveyed business sentiment (figure 4.1), that partly reflects declining commodity prices, easing house price inflation and rising interest rates. Nonetheless, the economy continues to grow faster than estimated potential output, and pressures on capacity have increased. Annual CPI Figure 4.2 Export commodity price indices (world terms) Index Index 450 450 Dairy 350 350 250 Meat Aggregate inflation increased to 1.6 percent in the June 2014 quarter. 150 Figure 4.1 Quarterly GDP growth and businesses’ reported activity (seasonally adjusted) Index 250 150 Forestry 50 2005 2007 2009 2011 2013 50 Source: ANZ Bank. % 2.5 2.0 GDP ANZBO 2.0 (including forecast) 1.5 activity outlook (RHS) 1.5 1.0 1.0 0.5 0.5 0.0 −0.5 0.0 −1.0 −0.5 −1.5 −2.0 QSBO DTA −1.0 (past 3 months) −2.5 −3.0 −1.5 2007 2009 2011 2013 Source: NZIER, ANZ Bank, NZIER, Statistics New Zealand, RBNZ estimates. Note: The QSBO DTA and ANZBO own activity outlook are standardised. External demand Dairy prices have fallen by 45 percent in GlobalDairyTrade auctions since peaking in February. While global dairy supply has increased, an important reason for the recent falls appears to be a build up of inventory in China. These inventories are expected to clear in coming months, with underlying consumer demand for dairy products in China remaining robust. In contrast, much of the 7.5 percent decline in forestry prices since April (as measured in the ANZ Commodity Price Index) appears to be a response to softening demand from China, related to the slowdown in the Chinese property sector. With slow growth in major economies, and New Zealand’s prospects relatively strong, net immigration has New Zealand’s trading partners have been risen further in recent months and is providing increasing growing at a moderate pace, notwithstanding recent support for housing and consumer demand. Over the volatility in the United States and Japan. The nature of past year, net immigration has boosted New Zealand’s the global recovery has meant that the considerable spare population by 41,000 people (0.9 percent). Arrivals have capacity in major advanced economies is being absorbed picked up in recent months, after reductions in departures only slowly. had played the greater role in the early part of the migration International prices for New Zealand’s agricultural cycle. exports have declined further in the past three months and Trans-Tasman flows are a key part of the net are supporting domestic demand to a lesser degree than immigration story, although arrivals from other countries at the start of 2014. The ANZ commodity price index has are becoming increasingly important. About 70 percent declined by 12 percent since February. These declines of the total increase in net immigration between July have been led by dairy and forestry prices, with meat 2012 and July 2014 was a result of fewer departures prices providing a partial offset (figure 4.2). to Australia and an increase in arrivals from Australia (figure 4.3). A key factor behind trans-Tasman flows 12 Reserve Bank of New Zealand: Monetary Policy Statement, September 2014 is increased slack in the Australian labour market as consent issuance there has accelerated in recent months. Australian mining investment slows. House price inflation has moderated further in the past three months, despite continued strong immigration. Figure 4.3 Permanent and long-term net immigration flows (annual total) 000s 60 50 40 30 20 10 0 −10 −20 −30 −40 −50 2000 Rising mortgage interest rates and the introduction of LVR restrictions in October last year have helped restrain rising housing demand. From a peak of 9.8 percent in November last year, annual house price inflation on a three-month 000s Other countries Total Australia 2003 2006 2009 2012 60 50 40 30 20 10 0 −10 −20 −30 −40 −50 Source: Statistics New Zealand. moving average basis eased to 6.2 percent in July 2014. The moderation in nationwide house price inflation has been led by Auckland (figure 4.5). Monthly house sales in the three months to July were 12 percent lower than last year and have stabilised (figure 4.6), suggesting that house price inflation may also stabilise through the middle of 2014. Figure 4.5 Stratified house price inflation by region (annual, 3 month moving average) Domestic demand % % Construction output has grown at an annual 20 average rate above 12 percent in the year to March 15 2014. Further increases in residential consent issuance 10 point to strength through the middle of 2014. The number 5 5 of new dwelling consents issued in the three months to 0 0 July was 18 percent higher than over the same period in −5 2013, underpinned by strong growth in both Canterbury −10 and Auckland (figure 4.4). To date, the increase in nonresidential building has been primarily in Canterbury, and Figure 4.4 Number of new dwelling consents (quarterly total) 000s 5 5 4 2 1 0 2000 Rest of New Zealand Auckland 2009 −5 Rest of New Zealand 2011 −10 2013 −15 2012 000s 000s 12 12 11 10 10 9 9 3 8 8 7 7 2 6 6 5 5 4 4 1 Canterbury 2006 10 Christchurch −15 2007 2009 Source: REINZ, RBNZ estimates. 15 11 4 2003 Auckland Figure 4.6 Monthly house sales 000s 3 20 0 Source: Statistics New Zealand. Note: ‘Quarterly’ corrects original release which was labelled ‘annual’, in error. 3 2000 2003 Source: REINZ. Reserve Bank of New Zealand: Monetary Policy Statement, September 2014 2006 2009 2012 3 13 Strong business confidence has translated through to increased investment. Real business investment rose by 10 percent in the year to March 2014. Surveyed investment intentions remain above long-term averages Figure 4.8 Growth in total gross weekly earnings (annual) % % and point to further growth in business investment over the 9 remainder of 2014, albeit at a more gradual pace (figure 8 8 7 7 6 6 5 5 4 4 3 3 2 2 1 1 0 0 4.7). The volumes of mechanical and electrical machinery imports have increased 5 and 9 percent respectively over the past six months, and the number of commercial vehicle registrations is at historically high levels. −1 2000 Figure 4.7 Investment intentions (standardised, seasonally adjusted) Index 4 4 ANZBO 2 2006 2009 2012 −1 3 Figure 4.9 Growth in real retail sales (quarterly, seasonally adjusted) 2 QSBO plant and machinery 1 2003 Source: Statistics New Zealand. Index 3 9 1 % % 0 0 4 −1 −1 3 3 −2 2 2 −3 1 1 0 0 −1 −1 −2 −2 −3 −3 −4 −4 −2 QSBO buildings −3 −4 2000 2003 2006 2009 2012 −4 Source: ANZ Bank, NZIER, RBNZ estimates. Businesses’ demand for labour has increased and the improving labour market is boosting household income and supporting spending. Nominal earnings increased at an annual pace of 6.2 percent in the June quarter −5 4 2005 2007 2009 2011 2013 −5 Source: Statistics New Zealand. (figure 4.8) and consumer confidence remains above average, despite some decline in sentiment in recent Capacity pressure and inflation months. Retail trade volumes increased at a quarterly rate Potential output is currently estimated to have of 1.2 percent in June. The growth in retail sales volumes grown by 2.8 percent in the year to the September 2014 points to moderate growth in real consumption through the quarter, boosted by strong investment, increasing rates of middle of 2014 (figure 4.9). labour force participation and net immigration. Although the pace of economic growth is beginning to moderate, the economy continues to grow at a faster pace than potential output and capacity pressures have increased. The output gap is currently estimated to be about 1 percent of potential output. There appears to be more pressure in the goods market than the labour market (figure 4.10), consistent with usual lags between the real 14 Reserve Bank of New Zealand: Monetary Policy Statement, September 2014 economy and hiring, and the recent boosts to labour supply. Nevertheless, the labour market is tightening, with the unemployment rate declining for four consecutive Figure 4.12 Reported costs and cost expectations Net % Net % 75 quarters to 5.6 percent in the June quarter. 75 60 Figure 4.10 Survey measures of capacity pressure (standardised) Index 2 45 3 Limiting factor − capacity 1 45 30 Index Limiting factor − new orders (inverted) 3 60 Past three months 2 1 30 Next three months 15 0 2000 2003 2006 15 2009 2012 0 Source: NZIER. Annual CPI inflation increased to 1.6 percent in 0 0 −1 −1 the June 2014 quarter, from 0.7 percent in June 2013. −2 −2 Recent increases in inflation appear to have boosted −3 inflation expectations at short horizons over 2013, though −4 expectations of inflation at longer horizons have trended −3 Difficulty finding labour −4 2000 2003 2006 2009 2012 down. Source: NZIER, RBNZ estimates. Rising food prices and housing-related costs While the output gap is positive, subdued wage made the largest contributions to annual CPI inflation in inflation is consistent with some remaining slack in the the June quarter, followed by increases in transport costs labour market. Nominal wage growth has been steady (figure 4.13). Annual CPI inflation is projected to moderate across a range of measures over the past three quarters to 1.3 percent in the September 2014 quarter as some (figure 4.11). Low nominal wage increases, combined with of the increases in transport costs unwind, declines in a high exchange rate, appear to be limiting cost pressure communication prices continue, and tradables inflation for firms (figure 4.12), keeping inflation contained. remains low. Figure 4.11 Nominal wage inflation (annual) Figure 4.13 Contributions to annual CPI inflation (year to June 2014) % -0.2 % 6 5 LCI (unadjusted) 4 6 Other household utilities 5 Construction and property maintainence 4 Household energy -0.1 0.0 0.1 0.2 0.3 0.4 0.5 ppts -0.10 0.00 0.10 0.20 0.30 0.40 0.50 ppts Food Transport Alcoholic beverages and tobacco 3 LCI (adjusted) 2 3 Miscellenous goods and services 2 Education Health Household contents and services 1 0 QES average hourly earnings 2005 2007 2009 Source: Statistics New Zealand. 2011 2013 1 Recreation and culture Clothing and footwear 0 Communication -0.20 Source: Statistics New Zealand, RBNZ estimates. Reserve Bank of New Zealand: Monetary Policy Statement, September 2014 15 Annual tradables inflation increased to 0.1 percent in the June quarter. Benign global inflation, reflecting excess capacity in trading partner economies, Figure 4.15 Composition of non-tradables inflation (annual, ex-GST) is supressing the international prices of many of New Zealand’s imports (figure 4.14). International oil and food prices have also been broadly stable, albeit at a high level, since 2011. Tradable prices have also been dampened by the elevated exchange rate. Figure 4.14 Trading partner export price inflation and New Zealand import price inflation (annual, US dollar terms) % % 30 30 New Zealand import prices 20 20 10 10 0 0 GDP−16 (ex−China) export prices −10 −20 −30 2000 2003 2006 2009 2012 % % 5.0 10 Construction (RHS) 4.5 8 4.0 6 3.5 4 3.0 2 2.5 0 2.0 Ex−construction 1.5 −2 −4 1.0 2000 2003 2006 2009 Source: Statistics New Zealand, RBNZ estimates. 2012 −6 Figure 4.16 Construction cost inflation by region (annual) % % 14 14 Canterbury −10 12 −20 10 10 8 8 6 6 4 4 −30 Source: Haver Analytics, Statistics New Zealand, RBNZ estimates. Note: GDP-16 is an aggregate of 16 of New Zealand’s major trading partner economies. China is excluded due to data availability. Annual non-tradables inflation was 2.7 percent in the June 2014 quarter. Non-tradables inflation has been 2 Auckland 0 −2 Rest of New Zealand 2007 2008 2009 2010 2011 2012 2013 12 2 0 −2 Source: Statistics New Zealand. centred on construction, with limited evidence of spillover to generalised inflation to date (figure 4.15). CPI construction costs increased by 1.2 percent in the June quarter, with the annual rate of increase at 4.6 percent. Construction cost inflation has been strong both in Canterbury and elsewhere (figure 4.16). 16 Reserve Bank of New Zealand: Monetary Policy Statement, September 2014 5 The macroeconomic outlook Growth in the New Zealand economy is projected to moderate to a more sustainable pace in coming Government’s reform agenda, and annual GDP growth of about 7 percent is expected over the next few years. years. While the boost to growth from construction, net In Australia, GDP is expected to grow at a immigration and recent high export prices will wane, below-trend pace until the end of 2015 as the transition domestic demand is expected to become increasingly from mining investment-driven growth to broader growth broad-based and self-sustaining. Consequently, the continues. Investment in the resources sector is projected gradual removal of monetary stimulus is needed to limit to continue to decline in coming years, with rising resource inflationary pressures and ensure that annual CPI inflation exports providing only a partial offset. Stimulatory policy settles around 2 percent over the medium term. settings in Australia should support the return to trend rates of growth by boosting other parts of the economy. External outlook The unemployment rate is likely to remain near 6 percent Economic growth across New Zealand’s major over the coming year. Performance of the New Zealand trading partners is expected to remain near its average and Australian labour markets is expected to continue pace over the projection. New Zealand is expected to to diverge over this time, which could support further net benefit from its increasing share of trade with the fast- immigration to New Zealand. Economic growth is strengthening in the United growing Asian economies (figure 5.1). States and the United Kingdom. Monetary authorities are Figure 5.1 Trading partner GDP growth (seasonally adjusted) Annual % 6 5 4 preparing to gradually remove the exceptional monetary policy stimulus of recent years, to maintain growth at sustainable rates and ensure price stability. Rising Quarterly % 2 Australia (RHS) GDP -16 Projection 1 3 2 1 0 -1 0 Other advanced economies (RHS) -1 Asia ex-Japan (RHS) -3 -4 2003 2005 2007 exports of New Zealand’s Asian trading partners, and their incomes. The growth outlook in the euro area and Japan is weaker, and further policy easing is likely. Tension between Russia and Ukraine has affected the fragile recovery in the euro area, and an escalation in tension -2 -5 growth in advanced economies will boost demand for the 2009 2011 2013 2015 2017 -2 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. GDP-16 is an aggregate of 16 of New Zealand’s major trading partner economies. In China, government stimulus has helped could slow the expected recovery further. Global inflation is expected to increase modestly as spare capacity in major trading partner economies is absorbed only gradually. This will help to limit import price inflation in New Zealand, although its impact will be partly offset by an assumed depreciation in the New Zealand dollar TWI, reflecting the adjustment to domestic economic growth and rising interest rates in some of the major economies. The New Zealand dollar is assumed to the remain relatively strong given New Zealand’s relatively Government’s target rate of 7.5 percent per annum. This favourable economic outlook and positive interest rate is despite the weakening property market, which poses differentials (figure 5.2, overleaf). While the high New a key risk to economic growth given its linkages to other Zealand dollar boosts domestic purchasing power, it sectors. Domestic demand will continue to benefit from will remain a significant headwind for export and import- the process of urbanisation and implementation of the competing industries. maintain aggregate economic growth around Reserve Bank of New Zealand: Monetary Policy Statement, September 2014 17 Domestic demand Figure 5.2 New Zealand dollar trade-weighted index Index Growth in the New Zealand economy is expected Index 85 to moderate to a more sustainable pace over the 85 projection, after outpacing estimated growth in potential 80 80 output for some time. 75 75 Strong construction demand will remain a key 70 70 contributor to economic output over the projection. 65 65 Construction output is expected to increase strongly 60 60 over the next year before stabilising about 11 percent of 55 55 potential output – a similar share to that seen at the peak 50 of the last cycle (figure 5.4). Projection 50 2005 2007 2009 Source: RBNZ estimates. 2011 2013 2015 Demand for New Zealand’s exports will continue to increase with global income growth, and with an increasing share of New Zealand’s exports going to faster-growing Figure 5.4 SNA expenditure on construction (seasonally adjusted, share of potential output) % economies in Asia. Strong growth in Chinese demand will 12 remain a key support for soft commodities. Consequently, 11 while prices of New Zealand’s export commodities have 10 fallen considerably in 2014 – driven by dairy and forestry % Projection 12 11 Total 10 9 9 8 Ex−rebuild 8 price outlook result in the terms of trade increasing by 7 7 about 5 percent through 2015, and remaining historically 6 2000 – they are expected to recover over the projection. The projected recovery in export prices and subdued import Figure 5.3 SNA terms of trade and components (seasonally adjusted) Index Index Projection 110 Export prices (world terms) 100 90 80 Terms of trade (RHS) 18 2015 6 Earthquake reconstruction will remain a key 1.3 As the shift towards significant residential repairs and 1.1 50 2000 2003 2006 2009 2012 Source: Statistics New Zealand, RBNZ estimates. 2012 source of construction demand for a prolonged period. 1.2 1 Import prices (world terms) 2009 1.4 70 60 2006 Source: Statistics New Zealand, RBNZ estimates. Note: Construction expenditure sums gross fixed capital formation of residential buildings, non-residential buildings and other construction (from quarterly expenditure GDP). Ex-rebuild construction expenditure subtracts RBNZ estimates of the direct impact of the rebuild on construction expenditure. high (figure 5.3). 120 2003 complete rebuilds progresses, and as large commercial projects get under way, reconstruction is expected to increase as a share of the economy over the next year before stabilising. Outside Canterbury, growth in building is expected to be strongest in Auckland where strong 2015 0.9 activity is expected to be required to accommodate future population growth. Reserve Bank of New Zealand: Monetary Policy Statement, September 2014 After increasing substantially to peak at the end of 2014, net immigration is expected to ease as economic conditions and labour markets in other countries improve (figure 5.5). Nonetheless, the cumulative boost to the population is expected to be substantial, with net immigration assumed to add more than 50,000 to the working-age population over the projection (an increase of about 1.5 percent). Figure 5.5 Permanent and long-term working-age migration (annual) 000s Figure 5.6 House price inflation (annual) % 40 30 Arrivals 20 70 10 60 0 Net (RHS) Departures 40 2000 −10 Projection 2003 2006 2009 2012 2015 25 20 15 15 10 10 5 5 0 0 −5 −5 −10 −10 2003 2006 2009 2012 2015 −15 Source: Corelogic NZ, RBNZ estimates. 90 50 30 20 −15 2000 50 80 Projection 25 Growth in household spending is expected to 000s 100 % 30 −20 Source: Statistics New Zealand, RBNZ estimates. The boost to population will be an important continue at a robust annual pace of around 3.5 percent through 2015. An improving labour market that contributes to growth in real incomes and low tradables inflation that boosts consumers’ purchasing power are supporting spending growth. Beyond 2015, consumption growth moderates as income growth slows and interest rates rise to more neutral levels. The significant improvement in household saving behaviour in recent years, compared to dissaving during the mid-2000s, is assumed to persist with the household saving rate positive over the projection (figure 5.7). contributor to demand pressure in coming years by increasing consumer and housing demand. However, increased aggregate demand pressure will be partly alleviated by the associated increase in labour supply. As noted in chapter 2, net immigration is assumed to have a Figure 5.7 Household saving rate (March years, percent of disposable income) % % more muted and more lagged effect on housing demand 4 than in previous cycles. 2 2 Annual house price inflation is projected to 0 0 moderate over the medium term from current rates −2 −2 of around 6 percent (figure 5.6), as mortgage interest −4 −4 rates increase, migration flows normalise and increased −6 −6 dwelling construction alleviates supply shortages. As −8 −8 chapter 2 notes, house price inflation is weak compared with what past relationships with net immigration, interest rates and other factors would suggest, and the projection −10 2000 2003 2006 2009 2012 Source: Statistics New Zealand, RBNZ estimates. Projection 2015 4 −10 assumes that this weakness continues. Reserve Bank of New Zealand: Monetary Policy Statement, September 2014 19 Even as the pace of economic growth eases, Consistent with the Pre-election Economic and conditions for businesses should remain favourable. Fiscal Update, fiscal consolidation is expected to dampen Business investment is expected to increase at a moderate economic output by a cumulative 1.7 percent over the pace to alleviate resource pressures. projection. Employment is projected to strengthen in line with GDP (figure 5.8). At the same time, growth in labour supply Capacity pressure and inflation is supported by high net immigration and historically high With the New Zealand economy growing at an rates of labour force participation. Overall, employment above-trend pace over the past 18 months, pressure on growth is strong enough to more than absorb the productive capacity has increased (figure 5.10). Capacity increasing labour supply, resulting in the unemployment pressures have been most pronounced in the construction rate falling to around 5 percent (figure 5.9). sector and are expected to remain so. Capacity pressures will ease over the projection as the impulse to growth from Figure 5.8 GDP and employment growth (annual average) construction, export prices, and net immigration dissipates, and interest rates increase to more-neutral levels. % % 7 7 6 Projection 6 5 5 4 3 2 1 4 GDP Employment Figure 5.10 Output gap (percent of potential output) % 3 5 2 4 1 % 5 Projection 4 3 3 −1 2 2 −2 −2 1 1 −3 2000 −3 0 0 −1 0 0 Source: Statistics New Zealand, RBNZ estimates. −1 −1 −2 −2 Figure 5.9 Unemployment rate (seasonally adjusted) −3 2003 2006 2009 2012 2015 2005 2007 2009 2011 2013 2015 −3 Source: RBNZ estimates. % % 8 8 Projection 7 7 6 6 5 5 4 4 Inflation expectations are well anchored and are expected to remain so in coming years as monetary policy targets 2 percent annual CPI inflation over the medium term. Various measures of medium-term inflation expectations have been broadly flat over the past year, and are currently lower than they were in the second half of the last decade. Well anchored inflation expectations will help 3 2000 2003 2006 2009 2012 Source: Statistics New Zealand, RBNZ estimates. 20 2015 3 ensure inflation remains near 2 percent. Reflecting this, wage growth is projected to rise only modestly – from 2.6 percent to 3 percent – with increased labour supply also alleviating pressure on wages. Reserve Bank of New Zealand: Monetary Policy Statement, September 2014 Non-tradables inflation has been relatively low the outlook for an extended period. In the absence of over the past year, but is projected to rise to be consistent other large shocks, growth would be expected to settle with capacity constraints in the economy. However, at around trend, with annual inflation settling at 2 percent the pick-up in non-tradables inflation is assumed to be and interest rate settings around neutral. gradual, and annual non-tradables inflation is forecast to peak at 3.4 percent in 2016. Inflationary pressures are expected to remain strongest in the construction sector, with construction cost inflation outpacing aggregate nontradables inflation. Tradables inflation is projected to increase over the medium term, reflecting the assumed depreciation in the New Zealand dollar. However, the subdued global inflation environment will limit the pick-up in tradables inflation. Combined, the increases in tradables and non-tradables inflation see CPI inflation increase gradually to settle at around 2 percent over the medium term (figure 5.11). Beyond our three-year projection period, reconstruction in Canterbury will continue to affect Figure 5.11 CPI inflation, and components (annual) % % 7 7 Projection 6 5 6 5 4 4 Non− tradables 3 3 2 2 1 1 0 −1 Tradables −2 −3 0 Headline −1 2005 2007 2009 2011 −2 2013 2015 −3 Source: Statistics New Zealand, RBNZ estimates. Reserve Bank of New Zealand: Monetary Policy Statement, September 2014 21 Box A Review of recent monetary policy decisions and economic conditions Figure A1 Official Cash Rate % % 9 9 Reflecting the spare capacity that initially 8 8 developed in the 2008/09 recession, the OCR has been 7 7 low for an extended period. The OCR was raised by 25 6 6 basis points from 2.5 percent at the March Monetary 5 5 Policy Statement. It was subsequently raised by 25 4 4 basis points in each of April, June, and July (figure A1). 3 3 Since monetary policy tightening began in March, demand and income growth have remained strong and capacity pressure has continued to rise. 2 2000 2003 2006 2009 2012 2 Source: RBNZ. Annual non-tradables inflation was 2.7 percent in the pressures. Interest rates remained low and further June quarter. For both wages and non-tradables prices, increases were expected to be needed for annual CPI increases have been notable in the construction sector. inflation to settle at 2 percent. However, it was prudent Tradables inflation remains very low, as has been to have a period of assessment before adjusting interest expected given the high exchange rate and weak world rates further towards a more-neutral level. The profile of inflation. future OCR rises would take account of developments At the July OCR Review, the Bank noted that in the inflation outlook, including how interest rate interest rate increases were starting to have an effect in increases were being transmitting through the economy. moderating economic growth and containing inflationary 22 Reserve Bank of New Zealand: Monetary Policy Statement, September 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) 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 Jun Sep GDP Quarterly 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 -1.1 -0.2 0.6 1.5 0.2 1.0 -0.3 -0.4 0.9 0.8 0.9 0.6 0.8 0.2 0.3 1.2 0.5 0.6 1.1 1.0 1.0 0.8 0.8 0.9 0.7 0.6 0.7 0.7 0.6 0.5 0.5 0.6 0.6 0.6 0.6 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 0.3 0.3 0.7 0.1 0.4 0.5 0.6 0.1 0.6 0.6 0.7 0.2 0.6 0.6 0.8 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 1.5 1.6 1.3 1.3 1.4 1.7 1.6 1.6 1.7 1.8 2.0 2.0 2.1 2.1 2.2 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 78.7 80.1 79.5 78.4 77.2 76.5 76.1 75.8 75.4 74.9 74.4 74.1 73.8 73.6 73.4 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 3.0 3.4 3.7 3.8 3.9 4.0 4.1 4.3 4.4 4.5 4.6 4.7 4.7 4.8 4.8 Notes for these tables follow on pages 27 and 28. Reserve Bank of New Zealand: Monetary Policy Statement, September 2014 23 24 Reserve Bank of New Zealand: Monetary Policy Statement, September 2014 10.7 16.6 8.7 20.5 6.8 3.8 21.0 Asset prices (annual percentage changes) Quarterly house price index (Quotable Value Limited) REINZ Farm Price Index (quarterly average to date) NZX 50 (quarterly average to date) 7.7 -6.5 26.9 20.3 1.9 2.4 2.0 2.4 15.5 1.7 2.2 2.3 1.5 1.0 1.5 0.3 0.0 0.1 0.9 2.4 -1.1 Mar 1.8 2.3 2.3 1.5 1.0 1.6 -2.2 -0.5 -0.8 0.9 2.5 -1.0 2012 Dec Pricing and costs (net balances) ANZ Bank Business Outlook - Pricing intentions, next 3 months (quarterly average to date) QSBO Average selling prices, next three months (economy wide) QSBO Average costs, past three months (economy wide) Inflation expectations RBNZ survey of expectations - inflation one-year-ahead RBNZ survey of expectations - inflation two-years-ahead 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 Sectoral factor model estimate of core inflation ex-GST CPI trimmed mean (of annual price change) ex-GST CPI weighted median (of annual price change) ex-GST GDP deflator (derived from expenditure data) PPI - Input prices PPI - Output prices Inflation (annual rates) CPI CPI non-tradables CPI tradables Table B Measures of inflation, inflationary pressures and asset prices 9.1 -1.8 28.9 18.1 18.6 22.2 1.8 2.3 1.5 2.1 2.3 1.5 0.8 1.3 0.3 0.0 0.8 0.7 2.5 -1.6 Jun 2013 10.2 10.8 26.7 24.0 21.0 29.4 2.0 2.3 1.9 2.4 2.3 1.6 1.4 1.8 3.4 3.3 4.1 1.4 2.8 -0.5 Sep 9.2 5.7 20.6 23.3 21.9 26.0 2.0 2.3 1.9 2.3 2.4 1.6 1.6 2.0 7.3 2.8 3.8 1.6 2.9 -0.3 Dec 7.3 9.0 16.5 37.2 18.4 31.6 2.2 2.2 2.0 2.3 2.6 1.6 1.5 1.7 6.3 3.1 4.0 1.5 3.0 -0.6 Mar 15.3 14.6 33.3 19.4 27.5 2.1 2.3 2.1 2.4 2.6 1.4 2.5 1.6 1.7 2.2 1.6 2.7 0.1 2014 Jun 5.6 12.0 24.6 2.1 2.2 2.0 2.2 2.6 Sep Reserve Bank of New Zealand: Monetary Policy Statement, September 2014 25 1 2.3 3.6 2.6 -2.1 -2.9 -2.7 1.2 -1.1 0.1 3.8 -1.6 1.8 2.8 3.4 Final consumption expenditure Private Public authority Total Gross fixed capital formation Residential Other Total Final domestic expenditure Stockbuilding 1 Gross national expenditure Exports of goods and services Imports of goods and services Expenditure on GDP GDP (production) GDP (production, March qtr to March qtr) Percentage point contribution to the growth rate of GDP. 2007 March year 2.9 1.3 3.7 10.8 3.5 4.8 1.1 6.0 1.8 8.8 7.4 3.7 4.8 4.0 2008 -1.9 -3.0 -2.7 -3.9 -1.9 -2.2 -0.5 -2.4 -21.3 -4.6 -7.8 -1.6 4.5 -0.3 2009 -0.1 2.1 4.0 -8.9 2.2 -1.3 -1.1 -2.2 -8.6 -9.7 -9.5 1.6 -0.0 1.2 Actuals 2010 (annual average percent change, seasonally adjusted, unless specified otherwise) Composition of real GDP growth Table C 1.8 1.2 2.9 11.4 0.7 2.2 1.1 3.4 0.3 2.1 1.8 2.4 2.0 2.3 2011 2.4 3.2 2.8 6.6 2.3 2.9 0.5 3.7 -0.5 5.4 4.4 3.1 0.2 2.4 2012 2.2 2.1 2.6 1.2 2.5 3.0 -0.5 2.0 19.4 5.1 7.3 2.6 -1.0 1.8 2013 3.3 3.8 0.3 7.9 2.5 4.8 0.3 5.1 16.9 9.3 10.6 3.4 1.9 3.0 2014 3.6 3.2 3.5 6.2 3.9 4.2 0.4 4.9 16.0 6.9 8.6 3.3 1.3 2.8 2015 2.7 2.6 1.7 4.6 2.8 4.1 -0.3 3.8 11.2 6.5 7.4 3.5 1.2 3.0 Projections 2016 2.3 2.2 3.1 3.6 2.3 2.6 -0.0 2.6 4.9 3.7 3.9 2.3 1.8 2.2 2017 26 Reserve Bank of New Zealand: Monetary Policy Statement, September 2014 March year Price measures CPI Labour costs Export prices (in New Zealand dollars) Import prices (in New Zealand dollars) Monetary conditions 90-day rate (year average) TWI (year average) Output GDP (production, annual average % change) Potential output (annual average % change) Output gap (% of potential GDP, year average) Labour market Total employment (seasonally adjusted) Unemployment rate (March qtr, seasonally adjusted) Trend labour productivity Key balances Government operating balance (% of GDP, year to June) Current account balance (% of GDP) Terms of trade (SNA measure, annual average % change) Household saving rate (% of disposable income) World economy Trading partner GDP (annual average % change) Trading partner CPI (TWI weighted, annual % change) Table D Summary of economic projections (annual percent change, unless specified otherwise) 2008 3.4 3.5 11.5 0.1 8.6 71.6 2.9 2.2 3.4 1.3 3.8 1.0 3.1 -6.8 8.8 -1.7 4.2 3.3 2007 2.5 3.0 2.3 0.6 7.6 65.6 2.8 2.6 2.7 2.0 3.9 1.1 3.4 -6.9 -1.6 -4.5 3.8 1.9 0.3 0.9 -2.1 -7.1 -2.4 -1.9 -0.9 5.2 0.9 -1.9 1.7 -0.3 6.7 61.6 3.0 3.1 7.3 17.6 2009 1.1 1.7 -3.3 -1.5 -4.1 0.2 -0.2 6.2 0.8 -0.1 1.3 -1.8 2.8 62.9 2.0 1.3 -7.5 -11.2 Actuals 2010 4.4 2.2 -9.2 -2.8 7.7 1.0 1.8 6.7 0.8 1.8 1.3 -1.2 3.1 67.1 4.5 2.0 8.0 3.5 2011 3.5 2.2 -4.5 -3.1 1.5 0.4 0.9 6.8 0.9 2.4 1.6 -0.4 2.7 70.6 1.6 2.1 -3.2 -1.8 2012 3.2 1.6 -2.1 -3.9 -4.2 -0.7 0.4 6.2 0.9 2.2 2.2 -0.3 2.6 73.3 0.9 1.8 -5.2 -4.3 2013 3.6 1.6 -0.9 -2.7 11.6 1.8 3.8 5.9 0.8 3.3 2.5 0.4 2.7 76.9 1.5 1.7 11.5 -3.1 2014 3.7 2.0 -0.2 -4.4 -4.0 1.2 2.3 5.1 0.9 3.6 2.8 1.1 3.7 78.8 1.4 2.1 -12.7 2.1 2015 4.1 2.1 0.3 -6.3 -3.2 0.1 1.6 5.0 1.0 2.7 2.9 0.9 4.2 75.9 1.7 2.2 7.3 2.7 Projections 2016 4.0 1.9 0.9 -6.1 2.1 0.7 1.1 5.1 1.1 2.3 2.9 0.4 4.6 74.3 2.1 2.1 3.9 2.9 2017 Notes and definitions 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 less 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, September 2014 27 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. 28 Reserve Bank of New Zealand: Monetary Policy Statement, September 2014 Appendix B Companies and organisations contacted by Reserve Bank staff during the projection round AB Equipment Ltd Leighs Construction Ltd Ag Hub Ltd Massey University Air New Zealand Ltd McIntosh Farm Machinery Ltd Auckland City Council McKee Plastics Ltd AWF Group Ltd Meat Industry Association BDO Central (NI) Ltd Mech Agriculture Ltd BM Agriculture Ltd Mike Greer Homes Ltd Building Officials Institute NZ Ltd Mitre10 NZ Ltd Buildtech Holdings Ltd New Zealand Oil and Gas Ltd Bunnings Ltd New Zealand Retailers Association Bushnell Construction Ltd Ngai Tahu Property Ltd Business Hawke’s Bay Northland Chamber of Commerce Calder Stewart Construction Ltd NZ Agriworks Ltd Canterbury Earthquake Recovery Authority NZ Contractors Federation Ltd Colliers International New Zealand Ltd - Christchurch Real NZ Institute of Architects Estate Management Office NZ Institute of Quantity Surveyors Council of Trade Unions NZ Labour Hire Ltd Crowe Horwath Ltd (Hawke’s Bay) Palmerston North City Council Dan Ashby Consultant Precinct Properties New Zealand Ltd Elders Ltd Prefab NZ Ltd Electrical Contractors Association of NZ Property Council New Zealand Ltd EQC Reese Group Ltd Ernst & Young Ltd Registered Master Builders Federation Fletcher Building Ltd Restaurant Brands NZ Ltd FMG Insurance Ltd Russell Group Ltd Fulton Hogan Ltd Spanbild New Zealand Ltd Godfrey Hirst New Zealand Ltd Spark New Zealand Ltd Hawkins Construction Ltd The Warehouse Group Ltd Humphries Construction Ltd Viridian Glass Ltd IAG Ltd Whyte Construction Ltd Landcorp Farming Ltd Reserve Bank of New Zealand: Monetary Policy Statement, September 2014 29 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 30 5.25 Reserve Bank of New Zealand: Monetary Policy Statement, September 2014 Date Percentage Date Percentage 29 January 2009 3.50 8 December 2011 2.50 12 March 2009 3.00 26 January 2012 2.50 30 April 2009 2.50 8 March 2012 2.50 11 June 2009 2.50 26 April 2012 2.50 30 July 2009 2.50 14 June 2012 2.50 10 September 2009 2.50 26 July 2012 2.50 29 October 2009 2.50 13 September 2012 2.50 10 December 2009 2.50 25 October 2012 2.50 28 January 2010 2.50 6 December 2012 2.50 11 March 2010 2.50 31 January 2013 2.50 29 April 2010 2.50 14 March 2013 2.50 10 June 2010 2.75 24 April 2013 2.50 29 July 2010 3.00 13 June 2013 2.50 16 September 2010 3.00 25 July 2013 2.50 28 October 2010 3.00 12 September 2013 2.50 9 December 2010 3.00 31 October 2013 2.50 27 January 2011 3.00 12 December 2013 2.50 10 March 2011 2.50 30 January 2014 2.50 28 April 2011 2.50 13 March 2014 2.75 9 June 2011 2.50 24 April 2014 3.00 28 July 2011 2.50 12 June 2014 3.25 15 September 2011 2.50 24 July 2014 3.50 27 October 2011 2.50 Reserve Bank of New Zealand: Monetary Policy Statement, September 2014 31 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 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) 32 Reserve Bank of New Zealand: Monetary Policy Statement, September 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, September 2014 33 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) 34 The Bank shall be fully accountable for its judgements and actions in implementing monetary policy. Reserve Bank of New Zealand: Monetary Policy Statement, September 2014