Download Monetary Policy Statement September 2008 Contents

Monetary Policy Statement
September 20081
This Statement is made pursuant to Section 15 of the Reserve Bank of New Zealand Act 1989.
Contents
1.
Policy assessment
2
2.
Overview and key policy judgements
3
3. Financial market developments
6
4.
The recent economic situation
10
5.
The macroeconomic outlook
19
A.
Summary tables
27
B.
Companies and organisations contacted by RBNZ staff during the projection round
32
C.
Reserve Bank statements on monetary policy
33
D.
The Official Cash Rate chronology
34
E.
Upcoming Reserve Bank Monetary Policy Statements and Official Cash Rate release dates
35
F.
Policy Targets Agreement
36
Appendices
This document is also available on www.rbnz.govt.nz
ISSN 1770-4829
1
Projections finalised on 29 August 2008. Policy assessment finalised on 10 September 2008.
Reserve Bank of New Zealand: Monetary Policy Statement, September 2008
1
1
Policy assessment
The Official Cash Rate (OCR) has been reduced by 50 basis points from 8.0 percent to 7.5 percent.
The New Zealand economy is experiencing a marked slowdown, led primarily by the household sector. The outlook
for the global economy has deteriorated further in the wake of continued financial market turmoil. In addition, the New
Zealand business sector is coming under pressure from both rising costs and falling demand. While domestic activity is likely
to pick up late this year as a result of personal tax cuts, increased government spending and rising rural incomes, we expect
a prolonged period of household sector adjustment and below-average growth.
The weakness in economic activity is expected to translate into lower inflation pressures in the medium term. Headline
inflation is expected to peak around 5 percent in the current September quarter before trending down thereafter. However,
food price inflation, exchange rate depreciation and higher wage costs will tend to keep headline inflation at elevated levels
through 2009.
With medium-term inflation pressures expected to ease, it is appropriate to move towards a less restrictive monetary
policy stance. Compared to the June Monetary Policy Statement, we have brought forward some of the projected interest
rate reduction, but have not altered the expected overall decline. We believe this response is warranted in light of the
tightness of current credit conditions and the time it will take to affect the actual interest rates faced by households and
businesses.
Looking ahead, the scale and timing of further official cash rate reductions will depend on signs of declining inflation
pressures and on exchange rate adjustments.
Alan Bollard
Governor
2
Reserve Bank of New Zealand: Monetary Policy Statement, September 2008
2
Overview and key policy judgements
Activity in the New Zealand economy is likely to have
more marked cycle than we projected in June, reflecting the
contracted in each of the first three quarters of 2008,
weaker near-term outlook for the household sector.
reflecting a range of factors. As is currently the case in other
economies, the long-anticipated housing market correction
is encouraging many households to cut back their spending.
As well as the decline in house prices, many households are
also experiencing falling financial wealth and/or reduced
liquidity via falling equity markets and developments in the
Figure 2.1
Gross domestic product
(annual average percent change)
%
6
%
6
Projection
5
5
4
4
finance company and mortgage trust sectors. Rising prices
for necessities, such as food, electricity and petrol, along
with rising effective mortgage rates, have already caused a
large reduction in spending on discretionary items, such as
3
Central
2
2
cars. Falling residential construction and real estate activity is
starting to push down employment.
Unusually dry weather last summer has also detracted
from growth, via its effects on agricultural production and
3
June
MPS
1
0
2000
2002
2004
2006
2008
Source: Statistics New Zealand, RBNZ estimates.
2010
1
0
hydro-electricity generation. Rising costs, declining margins
and the lagged effects of the previously high New Zealand
dollar are also weighing on the business sector.
The extended period of weak activity over 2008 and
2009 is expected to result in a sizeable build-up of excess
While we forecast growth to turn positive from the end
capacity, making it very hard for firms, particularly retailers,
of this year and gradually accelerate thereafter, it remains
to pass on increased costs to their customers. This has
below average for most of the projection. There are many
already been reflected in lower housing-related inflation,
factors contributing to this sub-trend outlook, including
and we expect ex-housing non-tradable inflation to fall quite
slowing trading-partner growth, high import prices,
sharply early next year. The extent of decline will depend
contractionary monetary conditions, further house price
crucially on the responses of wage inflation and inflation
falls, falling employment and the ongoing effects of higher
expectations, both of which we project to trend lower from
credit costs and reduced availability of credit on household
early next year. Conversely, tradable inflation is expected to
and business sector activity. The weaker domestic economy
hold up for longer, reflecting the combination of exchange
is expected to dampen import demand, contributing to an
rate depreciation and recent increases in international food
improved current account balance.
prices.
Fiscal policy is expected to partially offset the negative
We are assuming that the Emissions Trading Scheme
growth factors, reflecting a combination of increased
starts adding to inflation from early 2010, with the peak
government spending and transfers, and personal tax cuts
first-round effect on annual CPI inflation being about 0.6
over the next two and a half years. High (but declining) dairy
percentage points in early 2011. Overall, we are projecting
prices, rising international meat prices and recent exchange
annual CPI inflation to peak at 4.9 percent in the September
rate depreciation are expected to support agricultural
quarter of 2008, and declining thereafter. Excluding the
incomes, which will eventually feed through to household
first-round price effects of the Emissions Trading Scheme,
spending.
annual CPI inflation is projected to fall to about 2.4 percent
Overall, we are projecting annual average GDP growth
in mid-2010 (figure 2.2).
to trough at 0.3 percent early in 2009, before rising to 2.8
percent at the end of the projection (figure 2.1). This is a
Reserve Bank of New Zealand: Monetary Policy Statement, September 2008
3
Box A
years (figure A1). Global credit pressures, which intensified
Recent monetary policy decisions
noticeably from mid-2007, pushed domestic lending rates
In the three years to July 2007, the Bank increased the OCR
steadily to reach a cyclical high of 8.25 percent. The OCR
then remained on hold before being reduced by 25 basis
points at the July 2008 OCR Review, the first cut in five
even higher than would usually have been associated with
an 8.25 percent OCR.
This period of contractionary policy was needed to
offset the substantial inflationary pressures that had built
up in response to widespread and prolonged shortages of
Figure A1
productive resources, sharply higher export prices, as well
Official Cash Rate
as the second-round price effects of rising fuel and import
%
9
%
9
prices more generally.
8
8
high at the time of the July 2008 OCR Review, the outlook
7
7
6
6
5
5
4
4
While inflationary pressures were still uncomfortably
for activity had deteriorated further and credit pressures
had intensified. The Bank therefore reduced the OCR
at the July Review. Given the considerable uncertainties
surrounding the outlook for activity and inflation, it will
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Source: RBNZ.
be some time before a full evaluation of this decision, as
well as OCR settings over the past year more generally,
can be made.
Figure 2.2
Figure 2.3
CPI inflation
90-day interest rate
(annual)
%
6
Projection
5
Ex-ETS
Central
4
3
3
2
2
Ex-ETS
June
1
1
0
2000
2002
2004
2006
2008
Source: Statistics New Zealand, RBNZ estimates.
2010
%
10
Projection
9
5
Headline
4
%
6
0
%
10
9
June
MPS
8
7
Central
8
7
6
6
5
5
4
2000
2002
2004
2006
2008
2010
4
Source: RBNZ.
Despite the downward revision to the 90-day interest
With activity significantly weaker in the near term, and
rate projection over the next year or so, we expect the
credit spreads continuing to widen, we are now projecting
effective mortgage rate to continue to rise slightly over the
a significant decline in the 90-day interest rate over the next
coming months, and to decline only gradually thereafter. This
few months (figure 2.3). However, the 90-day interest rate
muted response is due to the high proportion of fixed-rate
is still expected to remain contractionary for some time,
mortgages in New Zealand and the wider spreads between
reflecting what we believe is needed to return inflation to
domestic wholesale interest rates and mortgage rates
a comfortable level.
4
Reserve Bank of New Zealand: Monetary Policy Statement, September 2008
resulting from increased bank funding costs. Rising effective
interest rates are also impacting the business sector.
While there are clearly risks to keeping monetary
conditions too tight for too long, easing monetary
conditions too quickly in response to these risks could create
Monetary policy judgements
The next year or two are going to be very challenging for the
Reserve Bank and the New Zealand economy. We are starting
from a position of tight monetary conditions and persistent
underlying inflation, with a series of cost shocks pushing up
headline inflation in the near term. While there are clearly
risks and uncertainties on both sides, we believe very weak
activity over 2008 and 2009 will cause inflation to fall back
to levels consistent with the target range over the medium
term. We are therefore projecting monetary conditions to
become less restrictive over the projection period.
The main question we face now is how far and how
fast monetary conditions should be eased. If monetary
conditions remain too tight for too long, there is a risk that
the New Zealand economy enters a prolonged downturn
unnecessarily. Depending on the severity, this could result
in significant underinvestment and potential financial
instability, hampering the long-term growth prospects for
the economy.
Reflecting continued weakness in many housing markets
internationally, we are projecting only a mild recovery in
global growth over 2009. Our projected outlook is weaker
than that implied by the latest Consensus forecasts, and we
believe the risks remain to the downside. These risks relate
its own problems. In particular, having inflation above the
target increases the likelihood that inflation expectations
become un-anchored, resulting in the need for a more
costly disinflation in the future. It is likely to be early next
year before we get a clear indication of the extent to which
slower activity is translating into lower underlying inflation.
Furthermore, over-stimulating the economy at this time
would risk slowing the unwinding of the macroeconomic
imbalances that have built up over recent years, increasing
the likelihood of a potentially larger and more disruptive
adjustment in the future.
Finally, as always, the future profile for the exchange
rate will be important for determining the mix of financial
conditions. While we are assuming a gradual depreciation in
the New Zealand exchange rate over the next few years, the
risk is that it falls faster and further. If the exchange rate were
to fall sharply then, in the absence of a further significant
deterioration in the economic outlook, interest rates would
likely be held higher than projected in figure 2.3.
At this time, we believe it is appropriate to lend
more weight to the downside risks associated with the
deteriorating global outlook, increased credit pressures, and
domestic housing market correction. However, we remain
mindful of the risks to inflation.
partly to a more protracted slowdown in Europe, but more
significantly to the risk that the effect of slowing Western
economies on Asia is more severe than we have assumed.
Complicating the current situation are global credit
pressures. Among other effects, this has meant that the
interest rates faced by New Zealand households and
businesses are higher than would otherwise be the case,
reflecting the higher cost of funds faced by lenders relative
to the OCR. This was one of the main motivations for the
reduction in the OCR in July. We do not expect this situation
to improve significantly for some time, and it might even
deteriorate further. Such deterioration would likely lead
to more weakness in the housing market, translating into
weaker household spending and business activity.
Reserve Bank of New Zealand: Monetary Policy Statement, September 2008
5
3
Financial market developments
Credit fears continue to impact on the global financial
Figure 3.1
system. From their origins in the US sub-prime mortgage
Credit default swap spread indices
market, credit market problems have continued to spread
Basis points
250
Basis points
250
June MPS
to a vast range of financing activities around the world.
Associated losses and asset write-downs have given rise
to fears about the strength of several global financial
200
200
United States
150
150
institutions. Accordingly, risk appetite in financial markets
remains significantly weaker than before the start of the
financial market turmoil in mid-2007.
These pressures are increasingly affecting the cost
and availability of credit in many countries, including New
Zealand, making the operation of monetary policy more
Australasia
100
50
banks has remained expensive, keeping overall funding costs
higher than would otherwise be the case. Over the past year,
these higher funding costs have been reflected in a higher
cost of credit for both households and businesses.
50
Europe
0
Jan 07 May 07
Sep 07
Source: Bloomberg, Reuters.
complicated. While domestic wholesale interest rates have
recently declined in New Zealand, offshore funding for
100
Jan 08
May 08
0
Sep 08
Shorter-term money market conditions also remain
fragile, with liquidity pressures still evident in overnight
and short-term money markets in many countries. Despite
continuing liquidity injections from central banks, spreads
between interbank (Libor and bank bill) rates and expected
policy rates (as measured by overnight indexed swap – OIS –
rates) remain high (figure 3.2). In July, the US Federal Reserve,
European Central Bank (ECB) and Swiss National Bank
Global financial conditions
announced extensions to the features of their emergency
Ongoing credit concerns have led to a renewed increase
lending facilities. In line with the actions of other central
in the cost of insurance against default for corporate
banks, the Reserve Bank has also progressively, over the past
borrowers in many countries (figure 3.1). Total asset write-
year, expanded the range of liquidity facilities it provides to
downs by global financial institutions have totalled nearly
financial institutions.
US$500 billion since the crisis began. Market analysts are
expecting substantial further losses and write-downs in
coming quarters. In the United States, five banks have failed
during the past two months, including IndyMac Banking
Figure 3.2
Spreads between three-month interbank and
OIS rates
Corporation, the second-largest bank failure in US history.
Basis points
140
Despite the announcement of US government support for
120
the housing agencies Fannie Mae and Freddie Mac – entities
which are seen as crucial to the provision of finance to the
US housing market – there is ongoing concern about US
credit market prospects. More generally, credit concerns and
ongoing risk aversion on the part of investors has meant
that term funding has remained expensive in global markets,
driving up funding costs for New Zealand institutions.
6
Basis points
June MPS
140
US
100
80
120
UK
100
Euro area
80
60
40
20
60
NZ
40
Australia
20
0
0
Jan 07 May 07 Sep 07
Jan 08 May 08 Sep 08
Source: Bloomberg, RBNZ.
Note: Bank bills are used for Australia and New Zealand
interbank rates. Libor rates are used for other countries.
Reserve Bank of New Zealand: Monetary Policy Statement, September 2008
As credit pressures increased, global equity prices
Figure 3.4
declined through to the middle of July (figure 3.3). Since
Wholesale interest rate curve
then, there has been some rebound in financial stocks after
Basis points
20
the US Federal Reserve and US Treasury announced the
0
provision of funding to Fannie Mae and Freddie Mac. Equity
markets have also been buoyed by lower oil prices (which
-20
declined after reaching a new record high in mid-July) as
-40
markets became increasingly convinced that slowing global
%
9.0
Net change
(LHS)
8.5
8.0
7.5
-60
Following
June MPS
economic growth would undermine energy demand.
-80
7.0
Current
Figure 3.3
-100
Global equity indices
Source: Bloomberg.
90d 180d 1yr
2yr
3yr
4yr
5yr
7yr
10yr
6.5
(Index = 100, 1 January 2007)
Index
130
120
June MPS
DAX 30
Index
130
120
ASX 200
110
110
100
100
90
S&P 500
Figure 3.5
Mortgage rates offered to new borrowers
%
12
%
12
11
11
10
FTSE 100
80
Jan 08
May 08
9
9
8
8
80
NZX 50
70
Jan 07 May 07 Sep 07
Source: Bloomberg, RBNZ.
10
Floating
5-year fixed
90
Sep 08
70
7
7
2-year fixed
6
1995 1997
Source: RBNZ.
1999
2001
2003
2005
2007
6
Domestic interest rates
After the OCR was cut by 25 basis points in July, New Zealand
wholesale interest rate markets have moved to price-in
The impact of lower domestic wholesale rates on
further easing over the next 12 months. New Zealand
mortgage rates has been muted by higher funding costs
wholesale rates have fallen at all maturities, although by
for banks in offshore markets. Accordingly, the spreads
more at shorter horizons than longer maturities (figure 3.4).
between local wholesale rates and mortgage rates have
This decline in wholesale rates has recently been reinforced
been widening in recent months and have risen significantly
by some easing in wholesale rates offshore.
above their longer-term averages (figure 3.6). The difference
Lower wholesale interest rates have led to some falls
between two-year fixed mortgage rates and the two-year
in the mortgage rates being offered to new borrowers and
swap rate is currently about 150 basis points. The floating
those facing the re-pricing of existing debt (figure 3.5). Two-
rate is currently around 260 basis points above the 90-day
year fixed rates have fallen below 9 percent for the first time
bank bill rate, compared to a ten-year average of about 180
in more than 12 months, but the pass-through into longer-
basis points.
term fixed rates and floating rates has been more limited.
Reserve Bank of New Zealand: Monetary Policy Statement, September 2008
7
Figure 3.6
surrounds the outlook for the effective mortgage rate,
Spread between 2-year fixed mortgage rate and
particularly given uncertainty around the outlook for bank
2-year swap rate
funding costs.
%
10
Basis points
300
2-year fixed mortgage rate
2-year swap rate
Spread
(RHS)
more difficult than for the household sector due to limited
200
available data. There are no direct measures of funding costs
150
Average (RHS)
1998
2000
2002
Source: Bloomberg, RBNZ.
2004
2006
2008
for the business sector, although estimates can be derived
from the weighted-average interest rate on the banking
100
sector’s overall loan portfolio. These estimates suggest the
50
cost of business credit has also risen sharply over the past
4
2
the cost of funding for borrowers in the business sector is
250
8
6
Determining the impact of credit market conditions on
0
year (figure 3.8).
Figure 3.8
The effective mortgage rate – the average rate being
paid on outstanding mortgage debt – has continued to rise
Effective lending rates by sector
%
10
%
10
since the June Statement (figure 3.7). This is because of
the run-up in fixed-term mortgages between January 2004
9
9
Non-residential
(estimated)
and January 2008, so that borrowers who fixed their rates
during this period are now facing higher rates as they roll
8
8
over. During the past three or four years, borrowers could
mitigate rising interest rate costs by searching for the fixed
Residential
7
7
period with the lowest interest rate. However, this option is
6
no longer possible.
2000
Source: RBNZ.
2002
2004
2006
2008
6
Figure 3.7
OCR and the effective mortgage rate
%
10
9
%
Projection 10
June
MPS 9
Effective mortgage rate
Central
8
8
Foreign exchange markets
In foreign exchange markets, the US dollar has appreciated
against other major currencies since the June Statement
(figure 3.9). The largest rises in the US currency have been
against high-yielding, commodity currencies such as the
7
7
OCR
6
6
5
5
4
4
1999
2001
Source: RBNZ.
2003
2005
2007
2009
New Zealand and Australian dollars.
In large part, the recovery in the US dollar over this
period is seen as reflecting changes in relative interest rate
expectations between the major economies (figure 3.10).
There has been relatively little change in expectations
regarding the US policy rate outlook, with markets continuing
A consequence of this is that many existing borrowers
to price-in rates remaining on hold until at least early 2009.
will not benefit immediately from the lower OCR, even
In contrast, despite inflation fears prompting the European
though new borrowers will. The effective mortgage rate is
Central Bank (ECB) to raise its policy rate in July, recent signs
projected to peak in the coming months and begin easing
of weakness in the euro area have seen markets move to
gradually thereafter. However, considerable uncertainty
price in a rate cut as the next move from the ECB.
8
Reserve Bank of New Zealand: Monetary Policy Statement, September 2008
Figure 3.9
A decline in the NZD/JPY has also occurred, with some
Movements in currencies against the US dollar
waning in demand by Japanese investors for the New
(Index =100, 1 January 2007)
Zealand dollar. Retail margin traders in Japan had significantly
Index
125
Euro
120
115
June MPS
Index
125
120
Australian dollar
NZ dollar
115
increased their net long positions in the New Zealand dollar
during July, but there have been signs they have pared these
back more recently. Moreover, issuance of Uridashi bonds
denominated in New Zealand dollars has also declined, with
110
110
105
105
issues denominated in emerging market currencies (such as
100
the South African rand).
100
95
British pound
Japanese yen
95
90
90
Jan 07 Apr 07 Jul 07 Oct 07 Jan 08 Apr 08 Jul 08 Oct 08
Sources: Bloomberg, RBNZ.
New Zealand dollar-denominated offshore
$billion
5
Financial market expectations of international
%
10
%
Expectation 10
8
New Zealand
$billion
60
Outstanding
(RHS)
4
policy rates
6
Figure 3.11
bonds
Figure 3.10
8
Japanese investors recently showing a greater preference for
3
2
1
Issues
0
Australia
6
30
4
United States
2
Euro area
0
2003 2004 2005 2006 2007
Source: Reuters, RBNZ estimates.
Note: Dashed lines as at June Statement.
2008
2009
20
-2
-4
-5
2
40
-1
-3
4
50
1996
2000
2004
2008
Source: Bloomberg, Reuters, RBNZ.
10
Maturities
2012
2016
0
0
Similarly, lower relative interest rate expectations,
combined with weak risk appetite and falling global
commodity prices, have seen the New Zealand dollar weaken
against the US dollar since the June Statement. However,
the New Zealand dollar has appreciated relative to the
Australian dollar, as markets have moved further towards
pricing-in more expected interest rate cuts from the Reserve
Bank of Australia and unwound large short positions in
the NZD/AUD cross rate. In addition, amidst a generalised
retracement in commodity prices in global markets, some
analysts have suggested that the NZD/AUD has benefited
from food commodities – which dominate New Zealand’s
export basket – faring better than the industrial commodities
which dominate Australia’s exports.
Reserve Bank of New Zealand: Monetary Policy Statement, September 2008
9
4
The recent economic situation
Reflecting fairly broad-based weakness across most sectors
Figure 4.1
of the economy, GDP contracted in the March quarter of this
Trading-partner growth and CPI inflation
year. Partial activity indicators and forward-looking measures
(annual)
suggest this was repeated in the June and September
%
6
%
6
quarters. Economic activity is expected to fall by a total of
5
0.8 percent over the first three quarters of 2008.
5
GDP
One of the key drivers to this weaker near-term activity
4
4
outlook has been further deterioration in the household
3
3
2
2
sector. The ongoing housing market correction, elevated
food, fuel and interest costs, and negative wealth impacts
from falling asset prices have all taken their toll on consumer
1
confidence and retail spending. Adding to that weakness,
0
severe dry weather has also contributed to the current
economic downturn by curtailing milk production and
reducing hydro-electricity generation. Finally, significantly
higher costs of credit – a result of global credit market
developments – combined with other cost pressures, and
reduced demand, has seen business sentiment and corporate
profitability expectations deteriorate markedly.
CPI
1
0
1995
1997
1999
2001
2003
2005
2007
Source: DataStream, RBNZ estimates.
Note: GDP is an export-weighted average of GDP growth in New
Zealand’s 12 major trading partners. CPI is an importweighted average of CPI inflation in those countries.
in Asia. Much of the strength seen in inflation in recent
quarters has been because of high commodity prices, which
have eased somewhat since the June Statement. However,
core inflation measures in many of our trading partner
Despite this sharp downturn in economic activity,
inflation pressures remain strong. In particular, higher petrol
and food prices have increased tradable inflation, while tight
capacity pressures and persistent wage inflation have kept
non-tradable inflation high. As a result, annual CPI inflation
rose to 4.0 percent in the June quarter, and is expected to
peak at 4.9 percent in September.
economies remain elevated (box B discusses the international
inflation environment in more detail). While central banks in
these economies remain mindful of the strength in inflation
pressures, they have become increasingly conscious of the
downside risks for growth.
Details of individual regions are as follows:
• Activity in the euro area contracted by 0.2 percent in the
June quarter, with strong cost pressures and tight credit
conditions weighing on domestic activity. Softness has
Global economic developments
been seen in retail spending and consumer confidence,
Since the June Statement, global growth has slowed
while indicators of business sector activity have fallen
significantly (figure 4.1). GDP has contracted in several of
sharply. At the same time, export activity in the euro
our trading partner economies, with weakness in activity
area is being restrained by the high level of the euro and
centred in European economies and some slowing in Asia
slowing global growth.
and Australia. Contributing to this deterioration has been
• Economic activity in the United Kingdom stalled in
the continued tightness in global credit conditions, as well
the June quarter, with weakness seen in all the main
as strong increases in the cost of living that have dampened
components of domestic demand. UK activity continues
households’ real incomes. In countries such as the United
to be dampened by an ongoing housing market
Kingdom and the United States, these conditions have
correction, with house prices and construction activity
exacerbated the dampening effects of housing market
continuing to decline. These conditions have been
weakness.
accompanied by falling consumer confidence. Indicators
Despite softness in global activity, inflation in most of our
trading-partner economies has been increasing, particularly
10
of business sector activity have also deteriorated.
(continued on p. 12)
Reserve Bank of New Zealand: Monetary Policy Statement, September 2008
Box B
Figure B1
The international inflation environment
Core inflation measures
Many central banks around the world currently face the
(annual)
uncomfortable combination of high headline inflation
%
4.5
%
4.5
and slowing growth. Recent annual CPI inflation figures
Australian
trimmed mean
in Australia, the United Kingdom and the euro area have
been 4 percent or above, and well above 5 percent in
3.0
US CPI exenergy/food
3.0
the United States. New Zealand’s Asian trading partners
are faring worse, with China, Hong Kong and Taiwan
1.5
1.5
registering annual inflation rates of about 6 percent, with
annual inflation in Malaysia above 8 percent.
This box looks in more detail at developments in the
international inflation environment. These developments
affect New Zealand inflation mainly through foreign
prices of imported consumer and intermediate goods, and
through export commodity prices.
Inflation in most of the world was at fairly low levels
between the mid-1990s and the mid-2000s. Inflation
pressure through this period was limited by generally weak
0.0
Asia’s development effectively boosted the world’s supply
of labour and intensified global competition.
Since roughly the middle of this decade, inflation
1997
1999
2001
2003
2005
2007
0.0
Source: DataStream.
in higher consumer prices, producer prices and export
prices in New Zealand’s trading partners. Supply problems
for a range of food commodities have compounded the
pressures on prices. This has been a particular issue in Asia,
where food occupies a much greater proportion of the
consumption basket.
global economic activity, and by emerging Asia’s increasing
role as the world’s source of cheap manufactured goods.
EU CPI exenergy/food
UK CPI exenergy/food
The pattern of pronounced increases in producer price
inflation since the mid-2000s is similar across developed
and emerging economies (figure B2). The strength of
global activity in general, and its transmission through
commodity prices and other costs of production, thus
in both emerging Asia and in developed countries has
trended up, largely due to sustained high growth in both
Figure B2
developed and emerging economies. Although developed
Producer price inflation by region
economies’ growth has slowed recently, the effects on core
(annual)
inflation and commodity prices are not yet convincingly
%
8
evident. Core inflation in many developed economies has
been rising, generating a similarly challenging environment
for monetary policy in those countries as we currently face
in New Zealand (figure B1).
The strength of global activity has increased the
AxJ
%
8
6
6
4
4
2
Developed
economies
0
2
0
-2
-2
high levels. International oil prices are probably the most
-4
-4
striking example of this phenomenon, roughly quadrupling
-6
demand for resources and boosted commodity prices to
in US dollar terms since 2004. Strong world growth has
also resulted in persistent increases in demand and prices
for many other commodities.
Higher prices for commodities, materials and other
1998
2000
2002
2004
2006
-6
Source: DataStream, RBNZ estimates.
Note: PPIs are import-weighted averages for each region.
AxJ consists of main Asian trading partners other than
Japan (China, Hong Kong, Malaysia, Singapore, South
Korea and Taiwan). Developed economies consist
of the United States, the United Kingdom, euro area
economies, Canada, Australia and Japan.
inputs to the production process have been reflected
Reserve Bank of New Zealand: Monetary Policy Statement, September 2008
11
appears to be a key reason for the increase in inflation,
economy. However, prices of exports from developed
rather than developments in specific countries or regions.
economies also rose over this period, again suggesting that
Figure B3 shows that the lengthy period of falling
the influence of rising commodity prices and strength of
prices of exports from Asia stopped around the mid-2000s.
demand has been fairly substantial across both developed
Several influences may be at work here, including the
and emerging economies.
tailing off of emerging Asia’s integration into the global
These offshore developments have strongly influenced
inflation pressure in New Zealand – a country that
Figure B3
both exports and imports commodities, and imports a
Export price inflation – selected AxJ economies
substantial amount of consumer goods from Asia. On the
(annual)
commodity export side, growth in global demand and
%
8
Developed economies
PPT
15
disruptions in global supply have together led to a rundown in world stocks of dairy and meat products. We
4
10
0
5
-4
0
noted large increases in world dairy product prices (the
effects of which are now evident at the retail level) some
quarters ago, while international prices for New Zealand’s
Difference (RHS)
-8
-5
meat exports have also risen strongly.
The growth outlook for Asia remains relatively healthy
(though, as noted in the text, there are downside risks to
-12
Selected Asian economies
-10
1998
2000
2002
2004
2006
Source: DataStream, Bank of Korea, RBNZ estimates.
Note: Asian export prices shown are a New Zealand importweighted average of export prices from Hong Kong,
Singapore, South Korea and Taiwan. Data for other
Asian economies are not available on a comparable
basis.
this outlook). To the extent that this growth continues
to underpin commodity demand, this source of global
inflation pressure might persist for some time yet.
• Japanese GDP contracted by 0.6 percent in the June
slowed, falling to 2.7 percent in the June quarter. There
quarter, led by a fall in domestic demand. In particular,
has also been some easing in business conditions, and
households’ real spending power has been constrained
consumer confidence remains at low levels. Despite this,
by high prices for necessities, especially fuel.
inflation pressures remain strong.
• Many of our other Asian trading partner economies
• In contrast to other economies, recent activity in the
have also experienced softening activity. GDP contracted
United States has been more resilient than expected
in Singapore and Hong Kong in the June quarter, while
given the considerable headwinds facing the economy.
growth slowed in China, South Korea and Taiwan.
Real GDP grew by 0.2 percent in the March quarter and
More recent data indicate that activity has continued to
0.8 percent in the June quarter. Contributing to this
slow. Industrial production growth has eased in some
growth has been the impact of tax rebates earlier this
economies. At the same time, high prices for food
year, which helped to support consumer spending. The
and fuel are dampening households’ real incomes.
weak US dollar is also helping to boost activity in the
Importantly, there are early signs that slowing global
export sector. Nevertheless, the US economy remains
growth is now contributing to softening export activity
soft. The US housing market remains weak, consumer
in Hong Kong and Singapore (though demand from
confidence is very low, and business sector surveys
emerging markets has provided some offset).
signal sluggish activity.
• Following increases in inflation and borrowing costs
over the past year, annual GDP growth in Australia has
12
Reserve Bank of New Zealand: Monetary Policy Statement, September 2008
Tradable sector prices and activity
services exports over the remainder of 2008, although a
Since the beginning of this year, global meat prices have
lower New Zealand dollar is likely to provide some offset.
increased significantly. Double-digit growth in meat
Turning to imports, following spectacular growth until
prices since March has helped push New Zealand’s export
mid-July, world oil prices have retreated from their peaks
commodity prices, in world price terms, to a record high in
in recent weeks, driven by market fears that weaker world
July (they eased slightly in August). In contrast, global dairy
growth will constrain demand. Prices of some staple foods
prices have continued to decline from their peaks, because
such as wheat have also fallen back, but remain well above
of production increases in North America and emerging
their historical averages. The lagged impact of elevated
consumer resistance.
world commodity prices and the weaker New Zealand dollar
On the volume side, after rising strongly over the second
half of 2007, primary export volumes stalled in the March
are likely to contribute to higher import prices over the
remainder of this year.
quarter, as the summer drought curtailed dairy exports
Strong domestic demand, limited spare capacity and
(figure 4.2). Since then, the adverse effects of the drought
the high New Zealand dollar underpinned strong growth in
have intensified. End-of-season dairy production and exports
import volumes through 2007 (figure 4.3). Import growth
showed significant weakness, consistent with anecdotes
remained buoyant in the March quarter this year, despite
that many dairy farmers reduced or stopped milking earlier
a contraction in domestic demand, suggesting possible
than normal. However, meat exports actually increased over
involuntary stock building. In line with this, survey data
this period, as meat farmers increased slaughter of breeding
suggest that many businesses are currently holding more
stock in response to dry weather and low returns.
stock than desired. More recently, merchandise trade for
the June quarter point to declining import volumes, possibly
Figure 4.2
due to businesses running down stock levels in response to
Export volumes
weaker economic conditions.
(seasonally adjusted)
95/96 $billion
6
95/96 $billion
3.0
Figure 4.3
Import volumes
(seasonally adjusted)
5
2.5
Manufactured
exports (RHS)
95/96 $billion
14
%
20
Level
4
10
2.0
10
3
Exports of services
(RHS)
1995
1997
1999
2001
2003
2005
Source: Statistics New Zealand, RBNZ estimates.
15
12
Primary exports
2007
1.5
In contrast to strong increases in primary exports since
5
0
8
-5
Annual growth
(RHS)
6
1995
1997
1999 2001
Source: Statistics New Zealand.
2003
2005
2007
-10
late 2007, export volumes of manufactured goods have
largely remained constant, and exports of services have
As a result of record high dairy prices, the goods
weakened over this period. Both these export components
balance has continued to improve since the second half of
fell in the March quarter, likely reflecting the high New
2007 (figure 4.4). While some deterioration in the services
Zealand dollar and weakening world demand. Further
and investment income balances over the same period
deterioration in our trading partners’ economies since then
has mitigated the extent of improvement in the aggregate
suggests fairly downbeat prospects for manufactured and
current account, the annual current account deficit has
Reserve Bank of New Zealand: Monetary Policy Statement, September 2008
13
continued to narrow, reaching just under 8 percent of GDP
June Statement, nationwide house sales have shown signs
at the end of the March 2008 quarter.
of stabilising, but remain at levels consistent with further
Figure 4.4
substantial declines in building activity in the near term
Current account balance, goods and services
(figure 4.6). Further underscoring this view, the number of
balances
residential building consents has also fallen sharply since
(annual)
May.
%of GDP
6
%of GDP
6
4
4
Goods balance
2
2
0
0
-2
Figure 4.6
Real residential investment and house sales
(seasonally adjusted)
-2
Services balance
-4
-4
-6
-6
-8
-8
Current account
Investment income
balance
balance
-10
1995 1997 1999 2001 2003 2005
Source: Statistics New Zealand.
2007
-10
Per thousand working aged persons
4.0
%of GDP
6.5
6.0
Residential
investment
3.5
3.0
5.5
2.5
5.0
2.0
4.5
REINZ house sales
(adv 6 months, RHS)
Domestic demand
4.0
Reflecting weaker demand from the household sector and
Source: Statistics New Zealand, REINZ, RBNZ estimates.
the effects of drought, economic activity contracted in the
March quarter (figure 4.5). Since then, further deterioration
in household conditions, and additional drought-related falls
in dairy production and lower hydro-electricity generation,
have become evident. As a result, we now expect further
declines in activity in the June and September quarters of
this year.
Contributing to the negative GDP growth in the March
quarter, residential investment declined sharply. Since the
Figure 4.5
%
1.5
Total GDP
1.0
Agriculture
related
0.5
0.5
0.0
0.0
-1.0
Household
related
-0.5
Mar 07
Jun 07
Sep 07
Dec 07
Mar 08
Source: Statistics New Zealand, RBNZ estimates.
14
2006
2008
1.0
In line with extremely low housing turnover and a rising
stock of unsold houses, the time it takes to sell a house has
risen considerably in recent months. Reflecting the fragile
market conditions, house prices also came under pressure,
with price measures falling since late last year (figure 4.7).
After allowing for compositional factors (e.g. proportionately
more high-value property sales), it is likely that house prices
have fallen even further during the June quarter than data
from REINZ suggest.
(seasonally adjusted, quarterly)
(seasonally adjusted, quarterly contributions)
-0.5
2004
House price inflation
contributors
1.0
2002
Figure 4.7
Production GDP growth and selected
%
1.5
2000
1.5
-1.0
%
5
4
REINZ
QV
%
5
4
3
3
2
2
1
1
0
0
-1
-1
-2
Mar 07
Sep 07
Mar 08
Sep 06
Source: Quotable Value Limited, REINZ, RBNZ estimates.
-2
Reserve Bank of New Zealand: Monetary Policy Statement, September 2008
In addition to falling house prices, households have also
Figure 4.9
had their wealth eroded by falling financial asset prices,
Business confidence
and continued increases in the cost of living. Furthermore,
Index
75
some households are exposed to the uncertainty associated
with recent finance company failures and the suspension
Index
60
NBBO own activity
40
50
of withdrawals from some investment trusts. Reflecting
this, surveyed consumer sentiment has fallen to its lowest
20
25
level since the 1991 recession, and real retail spending has
declined in recent quarters (figure 4.8). There have been
0
0
-20
some recent signs of improving consumer sentiment, as
petrol prices have fallen and mortgage interest rates for
new borrowing have eased. However, household sector
QSBO domestic trading activity (RHS)
-25
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
Source: NZIER, ANZ National Bank Group Ltd.
-40
conditions remain difficult, with further declines in spending
have been falling, indicating a significant jump in interest
likely over the remainder of 2008.
rate spreads for business lending. Some businesses may have
Figure 4.8
also faced reduced credit availability, given some tightening
Real retail sales growth and consumer
in lending standards by banks, and difficulties in the finance
confidence
Annual %
10
Westpac consumer
confidence
8
(adv 1 quarter, RHS)
Real retail sales
6
Index
140
company sector. As a result, non-agricultural business credit
130
4.10). Higher borrowing costs have also been apparent in
120
the household sector, where annual credit growth has fallen
4
110
2
growth has been trending down for several months (figure
to single digits for the first time since 2002. In stark contrast,
agriculture credit, especially credit to dairy farmers, has
100
0
Roy Morgan
consumer confidence
(adv 2 months, RHS)
-2
-4
90
80
1998
2000
2002
2004
2006
2008
Source: Statistics New Zealand, Westpac McDermott Miller, Roy
Morgan.
Note: Roy Morgan consumer confidence is a scaled monthly
average.
increased significantly this year.
Figure 4.10
Credit growth by sector
(annual)
%
25
The tight labour market and a strong New Zealand dollar
20
have underpinned robust business investment in recent
15
years. However, survey measures of business confidence
%
25
Non-agricultural business
20
Agricultural
15
Household
10
10
5
5
slowing domestic demand and sharply rising costs (figure
0
0
4.9). Measures of business profitability expectations, and
-5
subsequently investment and hiring intentions, have also
Source: RBNZ.
declined sharply towards the end of 2007 and during the
first half of 2008, as businesses have been faced with
1998
2000
2002
2004
2006
2008
-5
dropped to multi-year lows.
Developments in global credit markets have seen the
cost of funds for domestic lenders increase during 2008,
resulting in higher borrowing costs for businesses. This has
occurred at a time when domestic wholesale interest rates
Reserve Bank of New Zealand: Monetary Policy Statement, September 2008
15
Productive capacity and the labour
Figure 4.12
market
Labour costs and wages – private sector
There have been some signs of easing capacity pressures
over the past few months, suggesting the economy is in a
position of spare capacity for the first time in seven years.
(annual)
%
3.5
%
9
QES total weekly
gross earnings (RHS)
8
3.0
7
In particular, recent declines in surveyed skill shortages and
a rising unemployment rate (albeit from a historically low
level) suggest a moderation in labour market pressures. In
contrast, the QSBO measure of capacity utilisation remained
at a historically high level in the June quarter, possibly
6
2.5
5
2.0
4
LCI wage index
3
1.5
2
reflecting higher costs faced by businesses (figure 4.11).
1.0
1995 1997 1999 2001
Source: Statistics New Zealand.
Figure 4.11
2003
2005
1
2007
Capacity measures and annual average GDP
Inflation expectations
growth
(seasonally adjusted)
Normalised
2
There has been a further increase in survey measures of
%
8
Skill shortages
inflation expectations, with the RBNZ two-year ahead
measure reaching 3.0 percent in the September quarter
1
6
0
4
in which businesses are currently operating. QSBO survey
2
measures showed a rising proportion of businesses reporting
-1
GDP (RHS)
-2
0
-3
-2
Capacity utilisation
-4
-4
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
Source: Statistics New Zealand, NZIER, RBNZ estimates.
Despite easing pressures, conditions in the labour
market are still very tight in absolute terms. Labour force
(figure 4.13). This is likely to reflect the high-cost environment
higher input costs, but the proportion intending to increase
output prices rose to a lesser extent, suggesting widespread
margin compression.
Figure 4.13
Longer-term inflation expectations
(annual)
%
3.0
%
3.0
participation, while volatile from quarter to quarter, remains
at near-record levels, and the unemployment rate is still
below 4 percent. The strength of the labour market has
2.6
2.6
RBNZ 2-year-ahead survey
2.2
2.2
1.8
1.8
underpinned high wage inflation, despite some signs of
stabilising in recent quarters (figure 4.12). Wages typically
adjust slowly to changing labour market conditions,
AON 4-year-ahead survey
1.4
1.4
suggesting it will be some time before a softening labour
market affects wage growth.
1.0
1995
1997
1999
2001
2003
2005
2007
1.0
Source: RBNZ, Alexander Consulting.
16
Reserve Bank of New Zealand: Monetary Policy Statement, September 2008
Inflation
tight capacity pressures in the domestic economy. Strength
Despite clear signs of weakening economic activity, inflation
in underlying inflation pressures can also be seen in measures
pressures remain elevated. Given the lagged impact of high
of core inflation, such as the trimmed mean and weighted
capacity pressures, strong import commodity prices and a
median (table 4.1).
weakening currency, measures of producer price inflation
have accelerated to high rates. Other inflation measures
have also risen recently (figure 4.14).
Figure 4.15
CPI tradable and non-tradable inflation
(annual)
%
6
Figure 4.14
Other measures of inflation
%
6
Non-tradable
4
(annual)
4
CPI
%
12
%
12
Producer prices (inputs)
2
2
0
0
8
8
-2
4
GDP deflator
-2
Tradable
4
-4
0
0
1995 1997 1999 2001
Source: Statistics New Zealand.
2003
2005
2007
-4
Capital goods prices
-4
1995
1997
1999
2001
2003
2005
2007
-4
Source: Statistics New Zealand.
Annual CPI inflation increased to 4.0 percent in the June
quarter, from 3.4 percent in March (figure 4.15). Food and
oil price increases continued to be the key drivers, pushing
annual tradable inflation to 4.8 percent in the June quarter,
from 3.5 percent in March. While petrol prices have fallen
in recent weeks, continued strength in food price inflation
is likely to underpin tradable inflation in the near term. The
recent depreciation of the TWI is also adding to tradable
inflation.
The slowing housing market has had some dampening
effects on inflation. Construction cost inflation has continued
to ease, on a seasonally adjusted basis. Furthermore, rental
inflation showed signs of easing in the June quarter. This is
in line with anecdotes of increased rental supply as potential
property sellers refuse to accept lower prices and choose to
rent out the houses instead.
While housing related non-tradable inflation has
eased, non-tradable inflation ex-housing remains elevated,
reflecting the lingering effects of the sustained period of
Reserve Bank of New Zealand: Monetary Policy Statement, September 2008
17
18
Reserve Bank of New Zealand: Monetary Policy Statement, September 2008
3.3
NBBO - inflation one-year-ahead (quarterly average)
* average for month of July and August.
2.3
AON Economist survey - inflation four-years-ahead
3.1
2.4
2.7
2.6
2.4
3.0
2.7
2.7
Inflation expectation measures
RBNZ Survey of Expectations - inflation one-year-ahead
RBNZ Survey of Expectations - inflation two-years-ahead
AON Economist survey - inflation one-year-ahead
4.1
4.7
3.8
0.9
-2.8
2007
Mar
2.5
2.8
2.4
2.9
2.7
2.8
3.0
2007
Mar
3.8
4.2
3.7
1.2
1.3
2006
Dec
2.6
2.8
2.6
2.6
2.5
2.7
2.9
2006
Dec
Other inflation measures
Factor model estimate of core CPI inflation
CPI trimmed mean (of annual price change)
CPI weighted median (of annual price change)
CPI ex food, petrol and government charges
CPI ex food and energy
GDP deflator (derived from expenditure data)
CPI components
CPI non-tradables
Non-tradables housing components
Non-tradables ex housing, cigarettes and tobacco components
CPI tradables
Petrol
CPI
(annual)
Measures of inflation and inflation expectations
Table 4.1
3.2
2.5
3.2
2.5
2.7
2.6
2.5
Sep
Jun
2.7
2.6
2.7
2.5
2.3
2.7
1.9
1.8
3.9
3.7
4.9
3.1
-0.3
-5.9
Sep
1.8
2.7
2.0
2.4
2.1
2.1
4.1
4.1
4.7
3.9
-0.5
-8.4
Jun
2.0
3.1
2.6
3.0
2.7
2.8
Dec
2.8
3.5
3.2
2.0
1.8
5.6
3.5
4.9
3.0
2.8
16.9
Dec
3.2
3.3
2.6
3.0
2.7
3.1
2.8
3.5
3.2
1.9
1.6
5.9
2008
Mar
3.5
4.6
3.1
3.4
20.5
2008 Mar
3.4
3.4
2.6
3.3
2.9
3.1
Jun
3.0
3.8
3.4
1.9
1.5
n/a
3.4
4.0
3.1
4.8
25.9
Jun
4.0
3.7*
2.7
3.6
3.0
3.5
Sep
5
The macroeconomic outlook
The economic outlook is weaker than when we examined
World outlook
conditions in June. We now expect a more prolonged
We are projecting that global growth will slow sharply and
slowdown in economic activity, with a period of declining
remain weaker than trend over the remainder of 2008 and
output in the first nine months of 2008. Subsequently, we
through 2009 (figure 5.1, table 5.1).1 In doing so, we are
are projecting a return to modest rates of expansion, as the
projecting a weaker outlook for trading partner growth
household sector adjusts to tougher economic conditions
than the August Consensus forecasts. This is based on the
and net exports recover. Less restrictive monetary conditions
judgement that these Consensus survey results do not yet
and loosening fiscal policy settings are expected to prevent a
fully reflect the downside risks to the outlook for 2009.
larger slowdown in domestic activity. Higher export incomes
• Weakness in global growth is expected to be centred on
are then expected to filter through the economy, with
developed economies including the United States, the
annual average GDP growth approaching 3 percent at the
United Kingdom and the euro area. In these economies,
end of the projection.
housing market corrections, tight credit conditions and
In spite of the current weakness in economic activity,
near-term inflationary pressures are more intense, with
strong inflation pressures are expected to soften activity
over the projection period.
annual CPI inflation estimated to peak at 4.9 percent in
• Weak growth in developed economies is also expected
September. We then expect inflation to moderate over
to contribute to lower growth in our main trading
the projection. Further compression in retail margins and
partner economies in Asia, largely due to reduced export
declining oil prices are expected to offset the inflationary
demand. Early signs of such a slowdown are already
effects of the lower exchange rate and higher prices for
evident. However, in contrast to developed economies,
food and raw materials. The large amount of spare capacity
growth in most of our major Asian trading partners is
is also expected to contribute to a moderation in domestic
still expected to slow only modestly.
inflation, although persistent cost pressures and high
• Rising costs and increases in interest rates over the past
inflation expectations limit the extent to which inflation will
year have moderated domestic activity in Australia.
fall. CPI inflation is projected to fall below 3 percent by early
Further softness in activity is expected over the coming
2010 and closer to 2 percent in early 2011, excluding the
year, eventually leading to inflation pressures gradually
first-round effects of the Emissions Trading Scheme.
dissipating.
Table 5.1
Forecasts of export partner GDP*
(calendar year, annual average percent change)
Country
2003
2004
2005
2006
2007
2008f
2009f
Australia
3.0
3.9
2.9
2.7
4.3
2.7
2.4
Asia ex-Japan**
5.3
7.6
6.7
7.5
7.6
6.2
5.7
United States
2.5
3.6
2.9
2.8
2.0
1.6
1.1
Japan
1.5
2.7
1.9
2.4
2.0
0.8
0.7
Euro area***
0.8
1.8
1.8
2.9
3.0
1.5
0.7
United Kingdom
2.8
3.3
1.8
2.9
3.1
1.2
0.7
12 Country Index
2.8
4.1
3.3
3.7
4.0
2.8
2.4
*
**
***
Source: DataStream, RBNZ estimates.
Includes China, Hong Kong, Malaysia, Singapore, South Korea and Taiwan.
Includes Austria, Belgium, Cyprus, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, Netherlands, Portugal,
Slovenia and Spain.
Our projections for ‘global growth’ are based on an export-weighted average of growth in New Zealand’s 12 major export trading
partners.
1
Reserve Bank of New Zealand: Monetary Policy Statement, September 2008
19
Figure 5.1
World prices for manufacturing exports are also forecast
Trading partner GDP
to ease significantly over the projection. This largely reflects
(annual average percent change)
weaker demand in major export markets, particularly
%
5
%
5
Projection
4
4
June
MPS
3
3
2
2
Central
1
2000
2002
2004
Source: RBNZ estimates.
2006
2008
2010
1
the United States and Australia. Weaker world activity is
projected to also translate into lower world services export
prices.
With the recent falls in oil prices, our projected world
oil price track is largely unchanged from the June Statement
(figure 5.3). We expect world oil prices will continue to
ease, largely in response to slowing world growth. Prices
are expected to remain at historically high levels over the
projection, given the small amount of spare capacity and the
high marginal costs of extraction.
Figure 5.3
The terms of trade
Dubai oil price
After a substantial rise in export prices during 2007, we
expect a moderate easing in prices over the projection
(figure 5.2). However, the outlook for export prices is firmer
USD/barrel
140
USD/barrel
Projection 140
120
Central
120
than expected in June, reflecting a more positive outlook for
100
meat export prices. Our higher meat export price projection
80
is supported by expectations of more favourable demand
60
60
and supply conditions and higher feed costs. The outlook
40
40
for dairy export prices is largely unchanged from June, with
20
20
prices expected to continue to decline as supply increases.
100
June MPS
0
2000
2002
2004
2006
Source: Datastream, RBNZ estimates.
Figure 5.2
2008
2010
80
0
World commodity export prices
Other import prices are expected to remain firm over
(real terms, deflated using world CPI)
Index
130
the early part of the projection. High world prices for food
120
120
expected to contribute to this short-term strength. High
110
110
rates of inflation in emerging economies also suggest less
100
100
90
90
80
80
Index
130
Projection
and imported inputs (including fertilisers and iron ore) are
of a disinflationary impulse from these economies on global
inflation. From 2009 we expect the weaker world outlook
70
70
2000
2002
2004
2006
2008
2010
Source: Consensus Economics Inc., ANZ National Bank Group
Ltd, RBNZ estimates.
to contribute to lower world import prices, with the forecast
recovery in import prices in 2010 coinciding with the
projected recovery in world growth.
Combining the outlook for import and export prices,
we expect high oil prices to contribute to a sharp decline in
We are assuming meat and dairy prices will settle
the terms of trade in the near term (figure 5.4). Thereafter,
above their historical averages. In contrast, prices of forestry
the terms of trade are expected to stabilise at a high level
products are expected to remain subdued, given the weak
relative to their historical average.
outlook for housing markets in many of New Zealand’s
export destinations.
20
Reserve Bank of New Zealand: Monetary Policy Statement, September 2008
Figure 5.4
Export volumes
OTI terms of trade, world export and import
The weaker New Zealand dollar is expected to support a
prices
Index
150
Projection
140
130
World export prices
120
110
130
the slowing housing market conditions observed in trading
120
partners. Conditions for manufacturers are likely to remain
90
World import prices
2000
2002
2004
2006
2008
2010
modest given the difficult trading conditions for exporters.
Forestry export volume growth is likely to be hampered by
100
90
recovery in export activity (figure 5.6). However, this is fairly
140
110
Terms of trade
100
80
Index
150
80
difficult, particularly those servicing the household sector
in countries where consumer demand has been slowing.
Weaker labour markets in many of our trading partners are
expected to result in lower tourism numbers.
Figure 5.6
Source: Statistics New Zealand, RBNZ estimates.
Total export volumes (goods and services)
(percent of trend output and annual average
Exchange rate
percentage change)
The fall in the TWI over the past few months has been
sharper than assumed in our June projection. This is likely
to have been a consequence of the weaker New Zealand
economic outlook as well as the market expectation for
further OCR reductions. Our projection assumes further falls
in the TWI over the coming quarters.
%
35
Projection
8
34
% share
6
33
4
32
2
From late 2009, the TWI is assumed to decline more
gradually than we assumed in June, reaching 61 by early
2011 (figure 5.5). The slower path of decline in the TWI
largely reflects the lower starting point and an upward
%
10
31
0
AAPC (RHS)
30
2000
2002
2004
2006
2008
Source: Statistics New Zealand, RBNZ estimates.
2010
-2
revision to our commodity export price projection.
Based on the assumption of normal weather conditions
Figure 5.5
over the forecast horizon, we expect a gradual recovery in
Nominal TWI assumption
Index
75
Index
Projection 75
70
70
June MPS
65
65
60
Central
60
agricultural export volumes. Recovery from last season’s
drought underpins a rebound in dairy exports in the 2008/09
season. Despite improving export prices, meat export
volumes are likely to remain fairly subdued over the early
part of the projection. Farmers are likely to try to rebuild
stock numbers following the drought-related slaughtering
55
55
of breeding stock earlier this year. However, meat exports
50
50
are expected to recover later in the projection as sheep
45
2000
2002
2004
Source: RBNZ estimates.
2006
2008
2010
45
numbers improve and older cows from the larger dairy herd
are culled.
Reserve Bank of New Zealand: Monetary Policy Statement, September 2008
21
Import volumes and the current
Labour market and net immigration
account
We expect that employment will fall over the projection
Weaker domestic demand and the lower New Zealand dollar
are expected to lead to a protracted slowdown in import
volumes. In the short term, high wholesale and retail stock
levels suggest that firms might meet demand by running
down stock levels. Households are also assumed to continue
period as firms adjust staffing levels to reflect the weaker
trading environment. To date, labour market weakness has
been more concentrated in areas servicing the household
sector. However, as this weakness filters through the
economy, we expect retrenchment in other sectors.
The weaker employment outlook is expected to
cutting back on discretionary and luxury spending. This
typically includes goods and services with a higher import
content, including consumer durables, motor vehicles and
overseas travel. With pressures on capacity easing, firms
have less need to invest in imported capital equipment,
with more restrictive financing conditions and the lower
eventually lead to a moderation in wage inflation. As wages
tend to follow employment with a lag, we expect annual
wage growth to remain firm over the early part of the
projection, peaking in annual terms in early 2009. Beyond
this, wage inflation is expected to ease.
The softer employment outlook is also likely to discourage
exchange rate also likely to have an influence. As such,
the import penetration ratio is expected to ease over the
unemployed workers from actively seeking employment.
We expect the labour force participation rate to decline
projection period.
Much weaker demand for imports and the recovery in
export volumes are expected to offset the decline in the terms
of trade and drive a reduction in the current account deficit.
Lower corporate profits and lower domestic interest rates
slightly over the projection. Population ageing is also likely
to contribute to lower aggregate labour force participation.
Despite this, the unemployment rate is projected to climb
towards 6 percent by early 2011.
Net immigration is projected to approach 10,000
are expected to lead to an improvement in the investment
income balance later in the projection. By the end of the
projection, the current account deficit is forecast to narrow
persons per annum, which is stronger than forecast in the
June Statement (figure 5.8). This revision largely reflects
arrivals from Asia being higher than previously projected.
to just below 6 percent of GDP (figure 5.7).
The weaker outlook for the Australian economy is expected
Figure 5.7
to result in departures to Australia stabilising at current high
Current account balance, trade balance
levels. When combined with natural increase, annual growth
and investment income balance
in New Zealand’s working age population is projected to
(annual, percentage of GDP)
%of GDP
6
4
2
average 1.2 percent over the projection period.
%of GDP
6
Projection
4
Goods and services
balance
2
0
-2
0
-2
Current account balance
-4
-4
-6
-6
-8
-10
Investment income
balance
2000
2002
2004
2006
2008
Source: Statistics New Zealand, RBNZ estimates.
-8
2010
-10
Figure 5.8
Net permanent and long-term immigration
(annual total, working age persons)
000s
40
Projection
30
30
20
20
10
10
0
0
-10
-20
2000
2002
2004
2006
2008
Source: Statistics New Zealand, RBNZ estimates.
22
000s
40
-10
2010
-20
Reserve Bank of New Zealand: Monetary Policy Statement, September 2008
House price inflation and residential
purchasing power from higher near-term inflation and the
investment
lower exchange rate. On a per-capita basis, the level of
We continue to assume that a large adjustment is currently
occurring in the housing market. House prices are projected
to fall by 10 percent in 2008, with negative annual growth
rates persisting until 2011. From their peak in 2007, nominal
house prices are projected to fall by about 15 percent, or
24 percent in real terms, slightly more than projected in the
June Statement. Despite housing turnover stabilising over
the past few months, it remains at levels consistent with
falling house prices.
Tighter credit conditions, high mortgage rates, lower real
income growth and rising building costs (relative to existing
house prices) contribute to the weak outlook for residential
investment (figure 5.9). The slightly firmer outlook for net
immigration relative to June, and the lack of conclusive
evidence of a surplus of residential properties, is expected to
support residential investment over the projection period.
consumption activity is expected to remain below current
levels over the entire projection period.
With our projection incorporating further declines in
house prices and with the squeeze to corporate profits being
reflected in lower equity values, the balance sheet positions
of many households have deteriorated. This is likely to
reduce the willingness and ability of households to borrow.
The worsening labour market outlook and reduced sense of
job security is also likely to encourage a more circumspect
attitude to borrowing and spending decisions.
From mid-2009 onwards we expect consumption activity
to gradually recover, with annual average growth approaching
2 percent by the end of the projection (figure 5.10). Lower
short-term interest rates and higher export sector incomes
are expected to filter through to higher domestic spending.
Forthcoming tax cuts, higher government spending and
increased transfer payments to households will also support
Figure 5.9
household disposable incomes. As a consequence of weaker
Residential investment
consumer spending, the household saving rate is projected
(percent of trend output and annual average
to improve from -12 percent at present to about -5 percent
percent change)
%
7.0
by the end of the projection.
%
30
Figure 5.10
6.5
20
Real household consumption
6.0
10
5.5
0
5.0
-10
4.5
-20
AAPC (RHS)
Projection
% share
4.0
2000
2002
2004
2006
2008
Source: Statistics New Zealand, RBNZ estimates.
2010
-30
(percent of trend output and annual average
percent change)
%
64
AAPC (RHS)
63
Projection
%
8
6
62
61
4
60
2
59
Consumption
As a result of the pressures facing the household sector, we
are likely to see a period of consolidation from the period
58
57
0
% share
2000
2002
2004
2006
2008
Source: Statistics New Zealand, RBNZ estimates.
2010
-2
of high borrowing and spending that has occurred over
the previous five years. The weak outlook for consumption
reflects a broad range of factors, including reduced support
from household balance sheets, the softer labour market
outlook, rising borrowing costs, and reduced household
Reserve Bank of New Zealand: Monetary Policy Statement, September 2008
23
Business investment
In contrast, we continue to expect intangible asset
The outlook for business investment activity is also weak
investment to gradually increase as a share of GDP.
(figure 5.11). This is largely a consequence of the subdued
High energy prices are expected to support continued
near-term outlook for economic activity, with a large margin
oil exploration for several years. Higher investment in
of spare capacity developing over the projection period, and
infrastructure (including electricity generation), is expected
easing labour shortages reducing the need for labour saving
to underpin positive growth in other construction activity
investment.
over the early part of the projection.
Figure 5.11
Business investment
Government
(excluding computers and intangible assets,
Fiscal policy is expected to provide support to economic
percent of trend output and annual average
activity over the projection. Budget 2008 projections suggest
percent change)
%
14
Projection
13
12
10
government spending is expected to grow faster than the
15
in infrastructural spending (figure 5.12). The Government’s
10
announced personal tax cuts and higher social security
5
AAPC
(RHS)
11
%
20
rest of the economy, partly as a consequence of increases
spending are expected to provide further support to
domestic spending.
0
%share
9
2000
2002
2004
2006
2008
Source: Statistics New Zealand, RBNZ estimates.
-5
2010
-10
Figure 5.12
Government spending
(excluding military spending, percent of trend
output)
Corporate profitability has also been squeezed in a rising
cost environment. We expect firms to look more closely at
%
21.0
%
21.0
Projection
20.5
20.5
20.0
20.0
19.5
19.5
19.0
19.0
their cost structures. One of the ways of doing this is to cut
back on investment.
Tight credit conditions are further hampering the ability
of some firms to fund investment. This is expected to be
a more pressing constraint for firms in the non-residential
construction sector. Growth in plant and machinery
investment is expected to remain low, with surveyed
measures of investment intentions at their weakest since the
18.5
2000
2002
2004
2006
2008
Source: Statistics New Zealand, RBNZ estimates.
2010
18.5
early 1990s. Investment in transport equipment is expected
to remain subdued given the impact of the lower exchange
rate on the costs of imported vehicles. With the slowdown
in economic activity primarily related to weaker household
spending, the fall in core business investment is expected to
lag the economic cycle.
Gross domestic product
Our current projection suggests a deeper trough than
projected in June, with economic activity estimated to have
declined over the first three quarters of 2008. The causes
of the downturn are largely related to weaker domestic
demand, with much softer household sector activity
accompanied by an easing in business investment. The dry
24
Reserve Bank of New Zealand: Monetary Policy Statement, September 2008
weather earlier this year is also expected to contribute to
Inflation
some volatility in quarterly GDP readings.
We estimate annual CPI inflation will peak at 4.9 percent
Annual average growth is expected to decline to about
in the September quarter of this year. The decline in CPI
0.3 percent in early 2009 – the weakest since the recession
inflation from the September peak is expected to be driven
of the late 1990s (figure 5.13). An improving net trade
by moderating rates of tradable and non-tradable inflation
position, mostly on account of weaker demand for imports,
(figure 5.14).
helps to ensure that the projected trough in GDP is shallower
than in other recessionary periods. The low period of growth
is partly a consequence of the degree of monetary policy
tightness needed to ensure that medium-term inflationary
pressures ease.
(annual)
%
8
Projection
%
6
Projection
%
8
6
Non-tradable
4
(annual average percent change)
5
CPI, tradable and non-tradable inflation
6
Figure 5.13
Real gross domestic product
Figure 5.14
4
CPI
2
2
%
6
0
0
5
-2
-2
Tradable
4
4
3
3
2
2
1
1
0
0
inflation are maintained in the short term due to rising food
-1
-1
prices and the impact of the lower TWI on domestic import
1995 1997 1999 2001 2003 2005 2007 2009
Source: Statistics New Zealand, RBNZ estimates.
-4
2000
2002
2004
2006
2008
Source: Statistics New Zealand, RBNZ estimates.
2010
-4
Movements in oil and food prices continue to shape
our projection for tradable inflation. High rates of tradable
prices. The weaker retail environment and high stock levels
are expected to provide some offset as lower pricing power
Subsequently, we are projecting a return to modest
by firms is expected to result in further margin compression.
rates of expansion, as the household sector adjusts to the
We then expect annual tradable inflation to ease over the
new environment and the rebalancing of growth towards
projection, falling below 4 percent by late 2009 and below 3
an export-led recovery takes place. Less restrictive monetary
percent from mid-2010. This is partly a consequence of our
conditions and loosening fiscal policy settings are also
assumption that the TWI will decline gradually over the latter
expected to prevent further retrenchment to domestic
part of the projection, as well as an expectation of low, and
spending provide support to domestic spending. Higher
sometimes negative, rates of world import price inflation
export incomes are then expected to filter through the
over 2009 and 2010.
economy, with annual average growth approaching 3
percent at the end of the projection.
Non-tradable inflation is expected to remain high over
the next couple of quarters, driven by strong cost pressures
Risks to the outlook for economic activity are skewed to
emanating from wages, fuel and electricity. Non-tradable
the downside. A key risk is that the downturn persists for
inflation is then projected to moderate as demand pressures
longer than we anticipate, due to a more protracted global
subside. Housing-related inflation is projected to ease over
slowdown, or that the adjustment by the household sector
the projection period. Weaker demand in the residential
is larger than we anticipate.
construction sector is expected to lead to low, and for a time
negative, construction cost inflation. Dwelling rental inflation
is also likely to remain low as landlords strive to keep good
Reserve Bank of New Zealand: Monetary Policy Statement, September 2008
25
tenants. However, non-tradable inflation is higher than
through 2011. Excluding the first-round effects of the
implied by the extent of spare capacity due to high inflation
Emissions Trading Scheme, annual CPI inflation is expected
expectations, wage inflation and persistent cost pressures
to reach 2.4 percent by mid-2010 (see figure 2.2).
from other sources. Annual non-tradable inflation eases to
There remains considerable uncertainty around our
projection for inflation. Notwithstanding the downside risks
about 2.5 percent by the end of 2009.
The entry of stationary energy (which includes electricity
to activity, risks around the medium-term profile for inflation
generation) into the Emissions Trading Scheme in 2010
are on the upside. High near-term CPI inflation might become
is expected to push up non-tradable inflation. We have
more embedded in price and wage setting behaviour than
changed our judgement on the inflationary effects of the
we have assumed, with surveyed measures of inflation
emissions trading scheme for electricity (2010), spreading
expectations having moved higher. The TWI might weaken
out the direct price effects on retail electricity prices over
by more than assumed in our projection given the weak
all four quarters of 2010. We have not changed any of our
outlook for New Zealand activity. Increases in import prices
assumptions on the timing of the entry of vehicle fuels into
might also filter through into consumer prices by more than
the scheme (from 2011). As in June, we are assuming a
we have assumed, given the pressures on business margins.
carbon price of NZD 25 per tonne.
As a result of these changes, annual CPI inflation is
projected to be slightly lower over 2010, but slightly higher
26
Reserve Bank of New Zealand: Monetary Policy Statement, September 2008
Appendix A1
Summary tables
Table A
Projections of CPI inflation and monetary conditions
(CPI and GDP are percent changes)
CPI
CPI
Quarterly
2002
Mar
0.6
2003
2004
2005
2006
2007
2008
2009
2010
TWI
90-day
Annual
bank bill rate
2.6
51.6
5.0
Jun
1.0
2.8
54.6
5.8
Sep
0.5
2.6
53.9
5.9
Dec
0.6
2.7
56.4
5.9
Mar
0.4
2.5
60.6
5.8
Jun
0.0
1.5
61.1
5.4
Sep
0.5
1.5
62.4
5.1
Dec
0.7
1.6
63.9
5.3
Mar
0.4
1.5
66.9
5.5
Jun
0.8
2.4
64.0
5.9
Sep
0.6
2.5
66.3
6.4
Dec
0.9
2.7
68.6
6.7
Mar
0.4
2.8
69.6
6.9
Jun
0.9
2.8
70.8
7.0
Sep
1.1
3.4
69.7
7.0
Dec
0.7
3.2
71.5
7.5
Mar
0.6
3.3
68.2
7.5
Jun
1.5
4.0
62.8
7.5
Sep
0.7
3.5
63.6
7.5
Dec
-0.2
2.6
67.0
7.6
Mar
0.5
2.5
68.8
7.8
Jun
1.0
2.0
72.0
8.1
Sep
0.5
1.8
71.4
8.7
Dec
1.2
3.2
71.0
8.8
Mar
0.7
3.4
71.9
8.8
Jun
1.6
4.0
69.3
8.8
Second half average
1.0
4.7
65.3
8.0
First half average
0.8
4.1
63.6
7.4
Second half average
0.7
3.2
62.5
7.2
First half average
0.6
2.7
61.6
7.1
Second half average
0.8
2.8
61.2
6.9
CPI
CPI
GDP
GDP
Quarterly
Annual
Quarterly
Annual average
Quarterly projections
2007
Dec
1.2
3.2
0.8
3.1
2008
Mar
0.7
3.4
-0.3
2.9
Jun
1.6
4.0
-0.2
2.4
Sep
1.3
4.9
-0.3
1.5
Dec
0.7
4.4
1
Notes for these tables follow on pages 30 and 31.
Reserve Bank of New Zealand: Monetary Policy Statement, September 2008
27
28
Reserve Bank of New Zealand: Monetary Policy Statement, September 2008
1
3.8
4.8
GDP (production)
GDP (production, March qtr to March qtr)
Percentage point contribution to the growth rate of GDP.
3.5
Expenditure on GDP
4.0
3.8
Gross national expenditure
Imports of goods and services
0.1
Stockbuilding (1)
3.0
3.9
Final domestic expenditure
Exports of goods and services
6.8
Total
16.7
7.1
Business
Non-market government sector
2.0
Residential
4.5
5.0
5.0
7.2
7.8
4.7
-0.1
4.9
7.8
14.6
2.3
23.6
4.8
3.8
4.0
12.7
0.9
7.8
0.2
7.8
13.1
14.2
12.2
15.0
2.4
3.8
3.8
12.5
4.7
6.4
0.3
5.9
9.2
5.3
12.1
2.9
4.9
2.5
2.7
2.9
4.1
-0.1
4.3
-0.5
4.7
4.4
-1.3
8.4
-5.2
4.8
5.1
4.7
2006
2.3
1.6
2.6
-1.7
3.1
0.9
-0.9
1.9
-1.9
-8.5
-0.8
-2.7
3.2
4.4
2.8
2007
1.9
3.0
2.4
9.7
2.3
4.8
0.9
3.7
4.2
-6.7
5.7
3.7
3.5
4.2
3.3
2008
0.3
0.5
2.3
1.9
0.3
2.0
-1.3
0.0
-2.2
4.0
0.3
0.2
-0.1
-0.9
-0.1
0.3
-0.5
-0.9
10.9
-1.7
-2.9
-1.9
2.4
2.3
-18.6
0.7
2.1
-0.1
3.5
-1.1
Projections
2010
2009
6.2
4.3
5.0
Actuals
2005
4.1
4.7
6.6
2004
Market sector:
3.0
1.4
4.9
2003
Gross fixed capital formation
Total
2.8
4.0
Private
2002
Public authority
Final consumption expenditure
March year (annual average percent change, unless specified otherwise)
Table B
Composition of real GDP growth
3.2
2.9
2.8
2.2
5.0
1.9
0.0
2.0
3.1
7.6
0.9
10.4
1.6
2.6
1.4
2011
Reserve Bank of New Zealand: Monetary Policy Statement, September 2008
29
GDP (production, annual average % change)
Potential output (annual average % change)
Output gap (% of potential GDP, year average)
Government operating balance (% of GDP, year to June)
Current account balance (% of GDP)
Terms of trade (OTI measure, annual average % change)
Household saving rate
(% of disposable income)
World economy
World GDP (annual average % change)
World CPI inflation
Key balances
Labour market
Total employment
Unemployment rate (March qtr, seasonally adjusted)
Trend labour productivity
Output
1.6
1.7
1.9
-3.1
4.2
-3.8
3.5
5.2
1.6
3.8
3.4
0.2
5.4
50.3
Monetary conditions
90-day rate (year average)
TWI (year average)
2002
2.6
2.1
-2.9
-3.5
Price measures
CPI
Labour costs
Import prices (in New Zealand dollars)
Export prices (in New Zealand dollars)
March year
(annual percent change, unless specified otherwise)
Summary of economic projections
Table C
3.0
2.2
1.5
-3.4
-5.7
-12.4
1.5
4.8
1.4
5.0
3.7
1.4
5.9
56.4
2.5
2.2
-11.1
-15.5
2003
3.3
1.4
5.3
-4.8
3.9
-9.3
3.1
4.1
1.2
3.8
3.6
1.7
5.3
63.6
1.5
2.1
-10.5
-5.1
2004
3.7
2.1
4.2
-6.9
5.8
-9.8
3.4
3.8
1.2
3.8
3.2
2.3
6.5
67.1
2.8
2.5
0.5
4.9
Actuals
2005
3.6
2.4
7.3
-9.3
-0.8
-14.6
2.6
3.9
1.1
2.7
2.9
2.2
7.3
70.1
3.3
3.0
6.9
3.6
2006
3.6
1.9
4.8
-8.2
1.9
-14.1
1.7
3.7
1.3
1.6
2.7
1.0
7.6
65.6
2.5
3.0
0.3
4.8
2007
4.0
3.3
1.4
-7.8
7.6
-12.1
-0.2
3.7
1.7
3.0
2.7
1.3
8.6
71.6
3.4
3.5
1.0
12.5
2008
2009
4.5
3.6
21.1
9.7
8.1
66.0
0.3
2.7
-1.2
-0.2
4.8
2.0
1.4
-8.0
-1.9
-8.3
2.3
3.2
Projections
2010
2.8
3.1
2.3
0.9
7.3
62.5
1.9
2.7
-1.9
-0.4
5.6
2.1
1.4
-7.2
-3.3
-6.6
2.7
2.1
2011
3.0
2.3
2.7
0.9
6.9
61.2
2.9
2.7
-1.7
0.4
5.8
2.1
1.2
-5.9
-1.7
-5.2
3.5
2.0
Notes to the tables
CPI
Consumer Price Index. Quarterly projections rounded to one decimal place.
TWI
RBNZ. Nominal Trade Weighted Index of the exchange rate. Defined as a
geometrically-weighted index of the New Zealand dollar bilateral exchange rates
against the currencies of Australia, Japan, the United States, the United Kingdom and
the eurozone.
90-day bank bill rate
RBNZ. Defined as the interest yield on 90-day bank bills.
World GDP
Reserve Bank definition. 12-country index, export weighted. Projections based on
Consensus Forecasts. Seasonally adjusted.
World CPI inflation
RBNZ definition and estimate. TWI trading partners’ CPI inflation, weighted by TWI
weights. Projections based on Consensus Forecasts.
Import prices
Domestic currency import prices. Overseas Trade Indexes.
Export prices
Domestic currency export prices. Overseas Trade Indexes.
Terms of trade
Constructed using domestic currency export and import prices. Overseas Trade Indexes.
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.
Business investment
RBNZ definition. Total investment less the sum of non-market investment and
residential investment. System of National Accounts.
Non-market investment
RBNZ definition. The System of National Accounts annual nominal government
non-market/market investment ratio is interpolated into quarterly data. This ratio
is used to split quarterly expenditure GDP government investment into market and
non-market components.
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 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)
System of National Accounts.
Potential output
RBNZ definition and estimate. Refer to Conway, P and B Hunt (1997),
‘Estimating Potential Output: a semi-structural approach’, Reserve Bank of New
Zealand Discussion Paper, G97/9.
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.
Unemployment rate
Household Labour Force Survey.
Household saving rate
Household Income and Outlay Account.
30
Reserve Bank of New Zealand: Monetary Policy Statement, September 2008
Government operating balance
Historical source: The Treasury. Adjusted by the RBNZ over the projection period.
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.
Real gross domestic income
The real purchasing power of domestic income, taking into account changes in the
terms of trade. System of National Accounts.
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.
Reserve Bank of New Zealand: Monetary Policy Statement, September 2008
31
Appendix B
Companies and organisations contacted by RBNZ staff
during the projection round
Alexander Construction (HB) Ltd
Port Of Nelson Ltd
Allied Farmers Ltd
Ports of Auckland Ltd
Allied Telesis Labs Ltd
PricewaterhouseCoopers New Zealand
Aoraki Development Trust
Primeport Timaru Ltd
Arataki Honey Ltd
Progressive Meats Ltd
Auckland Chamber of Commerce
Rata Industries Ltd
Auckland City Council
Ravensdown Fertiliser Co-operative Ltd
Bayleys Real Estate Ltd
Skope Industries Ltd
Betacom Ltd
Smith City Group Ltd
C.J. Pask Winery Ltd
Solid Energy New Zealand Ltd
Canterbury Building Society Ltd
South Canterbury Finance
Canterbury Employer Chamber of Commerce
Staples Rodway Ltd
Colliers International New Zealand Ltd
T.P. Cookson Boat Builder Ltd
Collins Mitre 10 Ltd
Telecom New Zealand Ltd
Criterion Group Ltd
The New Zealand Sock Company Ltd
Croys Ltd
The Warehouse Group Ltd
CWF Hamilton & Co Ltd
Timaru Financial Services Ltd
Designline Citibus Ltd
Transpacific All Brite Industries Ltd
Drummond & Etheridge Ltd
UBS New Zealand Ltd
Electricity Ashburton Ltd
Vectek Electronics Ltd
Employers & Manufacturers Association (Northern)
Wellington Chamber of Commerce
Farmers Mutual Ltd
Wellington International Airport Ltd
Farmlands Trading Society Ltd
Westfield (New Zealand) Ltd
Harcourts Group Ltd
Weston Milling Ltd
Hawke’s Bay Employers and Manufacturers Association
Hawke’s Bay Fruitgrowers Association
Hertz New Zealand Ltd
Infratil Ltd
Kirkcaldie & Stains Ltd
KordaMentha
Mitre 10 (New Zealand) Ltd
Nelson Pine Industries Ltd
Nelson Tasman Chamber of Commerce
New Zealand Dairy Farmers Ltd
New Zealand King Salmon Ltd
New Zealand Sugar Company Ltd
Nissan New Zealand Ltd
Philips New Zealand Ltd
Port of Napier Ltd
32
Reserve Bank of New Zealand: Monetary Policy Statement, September 2008
Appendix C
Reserve Bank statements on monetary policy
OCR unchanged at 8.25 percent
OCR reduced to 8.0 percent
5 June 2008
24 July 2008
The Official Cash Rate (OCR) remains unchanged at 8.25
The Reserve Bank today reduced the Official Cash Rate
percent.
(OCR) from 8.25 percent to 8.0 percent.
Reserve Bank Governor Alan Bollard said: “The global
Reserve Bank Governor Alan Bollard commented that
economy is currently experiencing significant increases in
“more unpleasant international news has emerged since
oil and food prices. These price increases are occurring at
the June Monetary Policy Statement, and there is a risk
the same time as activity is weakening in many economies
that the domestic economy will slow further. Moreover,
in response to the global credit crisis and slowing housing
the cost of funds raised abroad by banks has been rising
markets. In New Zealand, this confluence of factors is
in recent months as the international financial situation has
producing a challenging environment of weak activity and
deteriorated. Today’s cut will help to mitigate the effect of
high inflation.
these increases on the actual borrowing costs paid by firms
“We project annual CPI inflation to peak at 4.7 percent
and households.
in the September quarter of this year. Although much of this
“Recent oil and food price increases mean that annual
reflects higher food and energy prices, underlying inflation
CPI inflation should peak around 5 percent in the September
pressure also remains persistent. Nevertheless, we do still
quarter of this year. However, we expect that inflation
expect inflation to return comfortably inside the target band
will return inside the target band in the medium term.
over the medium term. This is based on the expectation that
The weaker economy is expected to reduce pressure on
commodity prices stop rising, inflation expectations remain
resources, making it more difficult for firms to pass on costs
anchored, and weakening economic activity contributes to
and for higher wage claims to be agreed.
an easing in non-tradable inflation.
“Economic activity is likely to remain weak over the
“The outlook for economic activity is now weaker
remainder of 2008. The ongoing correction in the housing
than in our previous Statement. We project little GDP
market, together with the very high oil prices, will limit
growth over 2008, and only a modest recovery thereafter,
household spending and constrain the extent of recovery.
largely reflecting a weaker household sector. Government
However, high export prices and an expansionary fiscal
spending and personal tax cuts will provide some offset to
policy are expected to contribute to a gradual pickup in
this lower growth but will also add to medium-term inflation
activity through 2009.
pressure.
“Consistent with the Policy Targets Agreement, the
“Consistent with the Policy Targets Agreement, the
Bank’s focus will remain on medium-term inflation. In this
Bank’s focus will remain on medium-term inflation. Provided
regard, it is important to note that monetary policy has
the economy evolves in line with our projection, we are now
been reasonably tight for some time, and is now restraining
likely to be in a position to lower the OCR later this year,
activity and medium-term inflation pressures. Provided that
which is sooner than previously envisaged.”
the outlook for inflation continues to improve and there is
no excessive exchange rate depreciation, we would expect
to lower the OCR further.”
Reserve Bank of New Zealand: Monetary Policy Statement, September 2008
33
Appendix D
The Official Cash Rate chronology
Date OCR
(percent)
Date OCR
(percent)
17 March 1999
4.50
4 December 2003
5.00
21 April 1999 4.50
29 January 2004
5.25
19 May 1999 4.50
11 March 2004
5.25
30 June 1999 4.50
29 April 2004
5.50
18 August 1999 4.50
10 June 2004
5.75
29 September 1999 4.50
29 July 2004
6.00
17 November 1999 5.00
9 September 2004
6.25
19 January 2000 5.25
28 October 2004
6.50
15 March 2000 5.75
9 December 2004
6.50
19 April 2000 6.00
27 January 2005
6.50
17 May 2000 6.50
10 March 2005
6.75
5 July 2000
6.50
28 April 2005
6.75
16 August 2000
6.50
9 June 2005
6.75
4 October 2000 6.50
28 July 2005
6.75
6 December 2000
6.50
15 September 2005
6.75
24 January 2001 6.50
27 October 2005
7.00
14 March 2001 6.25
8 December 2005
7.25
19 April 2001
6.00
26 January 2006
7.25
16 May 2001 5.75
9 March 2006
7.25
4 July 2001
5.75
27 April 2006
7.25
15 August 2001 5.75
8 June 2006
7.25
19 September 2001 5.25
27 July 2006
7.25
3 October 2001 5.25
14 September 2006
7.25
14 November 2001 4.75
26 October 2006
7.25
23 January 2002 4.75
7 December 2006
7.25
20 March 2002
5.00
25 January 2007
7.25
17 April 2002
5.25
8 March 2007
7.50
15 May 2002
5.50
26 April 2007
7.75
3 July 2002
5.75
7 June 2007
8.00
14 August 2002
5.75
26 July 2007
8.25
2 October 2002
5.75
13 September 2007
8.25
20 November 2002
5.75
25 October 2007
8.25
23 January 2003
5.75
6 December 2007
8.25
6 March 2003 5.75
24 January 2008
8.25
24 April 2003 5.50
6 March 2008
8.25
5 June 2003 5.25
24 April 2008
8.25
24 July 2003 5.00
5 June 2008
8.25
4 September 2003 5.00
24 July 2008
8.00
23 October 2003 5.00
34
Reserve Bank of New Zealand: Monetary Policy Statement, September 2008
Appendix E
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
announcements for 2008 and 2009:
2008
23 October
OCR announcement
4 December
Monetary Policy Statement
2009
29 January
OCR announcement
12 March
Monetary Policy Statement
30 April
OCR announcement
11 June
Monetary Policy Statement
30 July
OCR announcement
10 September
Monetary Policy Statement
29 October
OCR announcement
10 December
Monetary Policy Statement
The announcement will be made at 9:00 am on the day concerned. 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.
Reserve Bank of New Zealand: Monetary Policy Statement, September 2008
35
Appendix F
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. Price stability
a) 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 objective of the Government’s economic policy is to promote sustainable and balanced economic development in
order to create full employment, higher real incomes and a more equitable distribution of incomes. Price stability plays
an important part in supporting the achievement of wider economic and social objectives.
2. Policy target
a) In pursuing the objective of a stable general level of prices, the Bank shall monitor 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 percent
and 3 percent on average over the medium term.
3. Inflation variations around target
a) 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 mediumterm target.
36
Reserve Bank of New Zealand: Monetary Policy Statement, September 2008
4. Communication, implementation and accountability
a) 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 and shall seek to avoid unnecessary instability in output, interest rates and the exchange rate.
c) The Bank shall be fully accountable for its judgements and actions in implementing monetary policy.
Hon Dr Michael Cullen
Dr Alan E Bollard
Minister of Finance
Governor
Reserve Bank of New Zealand
Dated at Wellington this 24th day of May 2007
Reserve Bank of New Zealand: Monetary Policy Statement, September 2008
37
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Reserve Bank of New Zealand: Monetary Policy Statement, September 2008
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Reserve Bank of New Zealand: Monetary Policy Statement, September 2008