Download Monetary Policy Statement March 2008 Contents

Monetary Policy Statement
March 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. The recent economic situation
11
4.
Financial market developments
20
5.
The macroeconomic outlook
25
A.
Summary tables
33
B.
Companies and organisations contacted by RBNZ staff during the projection round
38
C.
Reserve Bank statements on monetary policy
39
D.
The Official Cash Rate chronology
40
E.
Upcoming Reserve Bank Monetary Policy Statements and Official Cash Rate release dates
41
F.
Policy Targets Agreement
42
Appendices
This document is also available on www.rbnz.govt.nz
ISSN 1770-4829
1
Projections finalised on 25 February 2008. Policy assessment finalised on 5 March 2008.
Reserve Bank of New Zealand: Monetary Policy Statement, March 2008
1
1
Policy assessment
The Official Cash Rate (OCR) will remain unchanged at 8.25 percent.
The outlook for economic activity has deteriorated somewhat since we reviewed the OCR in January. The main reasons
are weaker prospects for world growth, tighter credit conditions, a sharper-than-expected slowing in the housing market, and
recent dry weather conditions. On balance, we now expect GDP growth of around 2 percent over the next three years.
Despite the weaker outlook for activity, we expect headline inflation to remain high, partly due to the inclusion of the
planned emissions trading scheme in our projection. Higher food and energy prices are also contributing to near-term
inflation. Furthermore, over the medium term, a tight labour market, strength in commodity prices, and the impact of
announced government spending plans and assumed personal tax cuts will add to inflationary pressure. Excluding the effects
of the emissions trading scheme, inflation is projected to return close to the mid-point of the target band by 2010.
There is more uncertainty than usual at present, with downside risks to activity and upside risks to inflation. The main
downside risks are a further deterioration in the world economy, tighter credit conditions, and the potential for a more severe
downturn in the housing market. Conversely, further strength in labour costs, additional fiscal stimulus, and high inflation
expectations represent key upside risks to underlying inflation.
Given this outlook, we expect that the OCR will need to remain at current levels for a significant time yet to ensure
inflation outcomes of 1 to 3 percent on average over the medium term.
Alan Bollard
Governor
2
Reserve Bank of New Zealand: Monetary Policy Statement, March 2008
2
Overview and key policy judgements
An extended period of strong growth has seen inflation
growth to run just below 2 percent throughout most of the
pressures in the New Zealand economy build up over the past
projection.
few years. These pressures, combined with rising oil and food
Figure 2.1
prices, contributed to CPI inflation reaching 3.2 percent in
Gross domestic product
the year to December 2007. Looking ahead, existing capacity
(annual average percent change)
pressures, a tight labour market, several cost increases –
%
6
including the Government’s planned emissions trading
scheme – and rising inflation expectations, are expected to
%
6
Projection
5
5
underpin inflation throughout the projection. However, the
4
outlook for activity has deteriorated significantly in recent
3
3
months, and is expected to contribute to easing inflation
2
2
pressures. More uncertainty than usual surrounds this
1
outlook, with activity risks generally on the downside and
inflation risks generally on the upside.
After a period of strong activity, the New Zealand
economy is entering an extended period of sub-trend
contributed to a sharp slowdown in the housing market.
This now appears to be spilling over to lower household
spending growth more generally. Net exports have also
been constrained for a number of years by the high New
Zealand dollar. A deteriorating global outlook and recent
dry weather domestically are expected to further weigh on
export incomes. Business investment, which looks strong
early in 2008, is expected to contract as profitability falls
and credit conditions tighten.
The large terms of trade boost coming from last year’s
Central projection
-1
-1
1995 1997 1999 2001 2003 2005 2007 2009
Source: Statistics New Zealand, RBNZ estimates.
Although this weaker activity outlook is expected to
lead to a significant reduction in capacity pressures, we are
now projecting slightly higher CPI inflation than we were
in December (figure 2.2). The main reason for the higher
inflation profile is that we have incorporated the expected
effects of the emissions trading scheme into the central
projection. The scheme is expected to add significantly to
inflation over 2009 and 2010 (see chapter 5). In addition,
existing capacity constraints, a tighter-than-expected labour
market, rising oil and energy prices, a tight housing rental
Figure 2.2
CPI inflation
some offset to these negative growth factors. Government
(annual)
spending is expected to grow strongly throughout the
%
5
tax cuts next year and current labour market strength are also
likely to offset some of the negative effects of falling house
prices and high interest rates on household spending.
Overall, GDP growth is projected to be significantly
1
0
sharp increase in international dairy prices will provide
projection, also supporting GDP growth. Expected personal
4
0
growth. Interest rate increases over the past few years (see
box A, page 4), combined with lower net immigration, have
Dec
projection
Central projection
Projection
4
3
%
5
4
Target range
3
2
2
weaker than assumed in the December Statement. The
deteriorating global outlook, dry weather, slightly sharperthan-expected slowing in the housing market, and tighter
credit conditions all contribute to this weaker growth
1
0
1995 1997 1999 2001 2003 2005 2007
Source: Statistics New Zealand, RBNZ estimates.
Dec
projection
2009
1
0
outlook (figure 2.1). We now project annual average GDP
Reserve Bank of New Zealand: Monetary Policy Statement, March 2008
3
market, rising food prices, and other administered charges
have also contributed to the higher inflation projection.
Box A
Annual CPI inflation is now expected to remain above 3
Recent monetary policy decisions
percent until early next year, before trending down to 2 /2
The OCR has been increased by a total of 100 basis
percent by the end of the projection.
points since the beginning of 2007 (figure A1). The four
1
Although the inflation outlook is slightly higher than
consecutive 25 basis point increases – the first in March
projected in December, the medium-term inflation path
2007 – were in response to signs of rising pressure on
excluding the first-round price effects of the emissions
medium-term inflation from a resurgence in the housing
trading scheme is somewhat lower than assumed previously
market and household spending, continued tightening
(see box B, page 6). The weaker medium-term inflation
in the labour market, fiscal stimulus, and the boost to
pressures reflect the expected lower growth outlook.
the terms of trade from rising international dairy prices.
Consistent with the Policy Targets Agreement, our
intention is not to offset the first-round price effects of the
Figure A1
emissions trading scheme. We will, however, be trying to
Official Cash Rate
prevent second-round price effects. Our updated 90-day
interest rate projection is very similar to that assumed in
December, with the 90-day interest rate expected to hold
near current levels until about mid-2009, before declining
%
9
%
9
8
8
7
7
6
6
5
5
gradually (figure 2.3). Obviously, this is only a projection, and
actual interest rates could follow quite a different trajectory.
Figure 2.3
90-day interest rate
%
11
4
Projection
10
9
8
Central projection
7
Dec
projection
6
%
11
10
1999 2000 2001 2002 2003 2004 2005 2006 2007
4
Source: RBNZ.
The statement accompanying the Bank’s OCR
9
increase in July 2007 indicated a pause in the tightening
8
cycle was likely in order to gauge how the economy
7
responded to the recent tightening. The subsequent
6
turbulence in global financial markets reinforced the
5
5
Bank’s decision to leave the OCR on hold since then.
4
4
In light of evidence of continued capacity pressures
3
3
in the domestic economy, the tightening in policy during
1995 1997 1999 2001 2003 2005 2007 2009
Source: RBNZ.
2007 – reinforced by increasing interest rate spreads –
seems to have been appropriate. Without this tightening,
it is likely that domestic inflation pressures would have
intensified considerably. Although the housing market
has slowed more quickly than expected, other pressures
on resources – supported by expected fiscal stimulus and
strong terms of trade – have remained intense.
4
Reserve Bank of New Zealand: Monetary Policy Statement, March 2008
Policy judgements
Internationally, we have seen mixed responses to recent
As noted above, more uncertainty than usual surrounds the
global developments. For some economies, these downside
economic outlook. Table 2.1 identifies what we currently
risks have clearly resulted in weaker activity, prompting
view as being the main upside and downside risks facing the
the respective central banks to lower official interest rates.
projection. Essentially, we are faced with high probability but
However, at this stage we believe these negative international
modest upside risks to inflation, offset by lower probability
factors pose less risk to the New Zealand economy. We do
but potentially severe downside risks to activity. While
not believe it is appropriate to lower official interest rates as
some of these risks can be assessed by looking back over
insurance against these downside risks, in light of elevated
history, or to other countries’ experiences, assessing other
inflation in New Zealand and additional upside risks to
uncertainties – including the effects of the emissions trading
inflation. We are not alone in this regard, with the Reserve
scheme – is more challenging.
Bank of Australia, among others, recently increasing official
As discussed in chapter 5, we expect the current US
interest rates in response to increased inflation concerns.
downturn and international financial market turbulence to
Even if other things pan out largely as assumed, an
have some negative effect on our trading partners’ growth,
additional risk is that the New Zealand dollar depreciates
and therefore on New Zealand activity. As discussed in box
faster than we have assumed – possibly because of increased
C, the potential for weaker global activity than we have
risk aversion or a change in investor preference in response
assumed is becoming increasingly likely. However, a seriously
to deteriorating New Zealand activity. It is likely that a sharp
bad outcome for the New Zealand economy would still
currency depreciation would help support export activity
probably require significant deterioration in the economies
and add to tradable inflation.
of Asia and Australia, as well as a sharp fall in the world
prices of our commodity exports.
Adding to inflation pressures in the central projection
is the fact that firms have had several cost increases, labour
Related to the international financial market turbulence,
costs being the most apparent. These cost pressures might
New Zealand lenders are facing increased funding costs, and
take longer to ease than we are assuming despite slowing
are starting to pass these on to their customers. There have
activity. If this was the case, non-tradable inflation could
also been anecdotal reports of a general tightening in the
be stronger than we have projected. Another upside risk
terms on which credit is being provided to both households
to non-tradable inflation is that the current healthy fiscal
and businesses. With real house prices still substantially
position opens the possibility for larger personal tax cuts
overvalued according to most metrics, further pressure on
and higher fiscal spending than we have assumed. While
the price and availability of credit would add to the potential
the size of any additional fiscal stimulus matters, the timing
for a more marked housing market correction.
and composition are also very important. In particular, fiscal
We view the above as downside risks. But if they were
stimulus occurring once inflation pressures have clearly
all to materialise, and recent dry weather was to persist for
eased is likely to be of less concern to monetary policy.
some time yet (see box D, chapter 3), only then would the
Finally, as discussed in box B, the emissions trading scheme
current situation start resembling the late 1990s recession
presents another new set of uncertainties, including the
in New Zealand.
potential for an emissions unit price higher than the $25 per
Table 2.1
tonne assumed.
Policy risks
Downside risks
Upside risks
Significant global slowdown and its effects on New Zealand
Additional fiscal stimulus
Higher funding costs and tighter domestic credit conditions
Persistent capacity pressures and tight labour market
Disorderly housing market correction
Significant exchange rate depreciation
Continued dry weather
Price of emission units
Reserve Bank of New Zealand: Monetary Policy Statement, March 2008
5
As noted in the December Statement, keeping medium-
Looking ahead, we will be watching developments
term inflation expectations in check in the face of these
closely as they unfold, updating our projections and policy
inflation pressures is essential for achieving inflation
view incrementally as new information comes to hand.
outcomes close to the mid-point of the target band over the
medium term. It is well recognised that reversing an increase
in inflation expectations can be difficult and costly.
Box B
fuel and electricity production costs are passed through
Emissions trading scheme
to retail prices. The planned scheme is to be phased in
Following the introduction of the Climate Change
(Emissions Trading and Renewable Preference) Bill in
December last year, the emissions trading scheme
discussed in the December Statement looks increasingly
likely to be implemented. As such, it is appropriate to
include our current best estimates of the effects into our
central projection, despite the large amount of uncertainty
surrounding the details of the scheme and its likely
macroeconomic effects.
Current estimates are that New Zealand will exceed its
emissions target, and, as such, will be a net purchaser of
emissions units from overseas. Recent Treasury estimates
place this liability at approximately 451/2 million tonnes of
greenhouse gases over the 2008 to 2012 commitment
period,1 or just above $1 billion assuming an emissions unit
price of $25 per tonne. The purchase of these units from
abroad will absorb funds that could otherwise have been
spent domestically.
In examining the likely macroeconomic effects of
the scheme, there is considerable uncertainty around the
outlook for the price of emissions units. The European
market price (currently about NZD40 per tonne) is likely to
represent a cap, as emissions units can be readily acquired
from this market. However, differences between the New
Zealand and European trading schemes mean that the
European price is not necessarily a good indicator of what
the New Zealand price will be. For now, we assume $25,
but recognise that this price could be quite volatile and
that there is more upside risk than downside.
Although households are not directly involved in the
scheme, consumer prices are likely to increase as higher
1
6
See http://www.treasury.govt.nz/government/liabilities/
kyoto.
gradually over the next few years.
There are also likely to be indirect price effects from
the scheme as higher fuel and electricity production
costs are passed through to other retail goods and
services – particularly those with high transport and
energy intensities, including transport and manufactured
consumer goods. We have assumed the indirect price
effects of the scheme are likely to be about half of the
direct price effects. However, there is a large margin of
error around this assumption. Combined, we refer to these
direct and indirect effects as first-round effects.
In the central projection, interest rates do not try to
offset these first-round price effects. Such an interpretation
is consistent with the Policy Targets Agreement, which
includes ‘significant government policy changes that
directly affect prices’ as reasons why ‘the actual annual
rate of CPI inflation will vary around the medium-term
trend of inflation, which is the focus of the policy target’.
Abstracting from the first-round price effects of the
emissions trading scheme, annual CPI inflation is projected
to fall below 21/4 percent by mid-2010 (figure B1). This is
below the inflation projection in the December Statement,
reflecting the downward revision to the activity outlook.
In addition to the first-round effects, there are likely
to be second-round price effects from the scheme. By
second-round effects we mean the extent to which
higher prices for energy and energy-intensive goods and
services prompt businesses and consumers to alter their
perceptions about aggregate inflation, and therefore alter
their wage and price setting behaviours. Conceptually,
the line between the indirect effects on energy-intensive
goods and services and second-round effects is clear, with
the former being relative price shifts and the latter being
Reserve Bank of New Zealand: Monetary Policy Statement, March 2008
Figure B1
Ultimately, the extent of second-round effects will
CPI inflation
reflect the confidence the public has in the Bank achieving
(annual)
the 1 to 3 percent inflation target in the medium term.
%
5
%
5
of medium-term inflation expectations, measured wage
Projection
Central projection
We will therefore be closely watching surveyed measures
4
4
3
3
inflation and pricing intentions.
In the central projection, we have assumed the
first-round price effects would – without any interest
Central
ex-first
round ETS
2
2
1
1
0
0
rate change – lead to some limited second-round price
effects. This is something that monetary policy should try
to combat. As a result, including the emissions trading
1995
1997
1999
2001
2003
2005
2007
Source: Statistics New Zealand, RBNZ estimates.
2009
scheme in the central projection not only increases inflation
due to the first-round price effects, but also the potential
a generalised increase in prices. However, in practice,
for second-round price effects means that interest rates
identifying the difference is very difficult.
are projected to be higher and GDP growth lower than
The extent of any second-round effects is likely to be
influenced by a number of factors.
what they would be if the scheme is not introduced.
Obviously, the more consumers and businesses alter
• To the extent that the introduction of the scheme and
their pricing behaviour in response to the introduction
its likely effects on fuel and energy prices are likely to
of the scheme – beyond the first-round effects – the
be well publicised, consumers and businesses might
larger the second-round effects will be and the larger the
view these largely as one-off price level shifts and
required interest rate response.
therefore not alter their price-setting behaviour, such
We have assumed that the scheme is likely to
as in response to the changes to GST in the 1980s.
encourage greater investment in environmentally friendly
• Conversely, given that the scheme will be phased in
ventures such as wind farms. However, we have not made
over many years and that it will not be obvious to us
much allowance in the central projection for a number of
or the public how much various prices will change
other potential effects of the scheme, partly because some
in response to the scheme, agents might build a
details of the scheme are yet to be determined. We have
temporary increase in inflation into higher expectations
made no allowance for the inclusion of other industries
for future inflation.
after 2010, or the effects of any government transfers
• Furthermore, second-round effects could be larger
provided to households and businesses to compensate
to the extent that inflation expectations appear to
them for higher costs/prices associated with the scheme.
be more responsive to regularly purchased items.
In addition, we have not assumed a significant reduction
In addition, evidence suggests that firms are more
in investment in response to the uncertainty surrounding
inclined to raise selling prices when costs – particularly
the scheme and the associated emission unit price.
identifiable costs – increase than they are in response
to increased demand.
Finally, in the same way as fluctuations in the world
price of oil have caused considerable volatility in inflation
• Finally, the extent of second-round effects will
and, to a lesser extent, output over the past few years, it is
be influenced by the state of the economy when
likely that the transition to the emissions trading scheme
the scheme is introduced, with stronger demand
and ongoing fluctuations in the emissions unit price will
conditions and a tight labour market likely to amplify
result in increased volatility in output and inflation.
second-round effects.
Reserve Bank of New Zealand: Monetary Policy Statement, March 2008
7
Box C
The impairment of credit markets and the prospect
Sources and implications of a large
international downturn
of a sustained period of financial system de-leveraging
raise concerns about the impediment to investment and,
to a lesser extent, consumption activity going forward.
The outlooks for the US and other major economies are
currently a major source of downside risk for the New
Zealand economy. In this box we highlight the most
influential factors that we feel could cause a substantial
international downturn, and trace the main transmission
mechanisms through to the New Zealand economy. Figure
C1 summarises – for clarity, only the most important
mechanisms are shown.
It also raises concerns about how much of the increases
in asset values and in investment over recent years have
been driven by excessively easy credit. Investment and
asset prices could drop markedly if this support has been
substantial. Moreover, weakness in investment would be
difficult to remedy through monetary stimulus if financial
institutions become unwilling or unable to lend.
The financial system problems and the fragile US
Figure C1
housing market are reinforcing each other, and household
International shock transmission
spending growth and labour markets are starting to turn
Financial disruption
Europe
Cost/availability of credit
de
m
rt
an
d
po
de
Ex
United
States
m
po
rt
an
Ex
d
Asia
d
an
ity
em d
t d mo
m
co
d
ar
or
p
Ex
Ex
So
ft
po
H
Australia
rt
co
m
de
m
m
od
an
ity
prices are falling. The large volume of low-equity loans
issued in the US in recent years raises a clear risk of large
numbers of borrowers with negative equity walking away
from their homes. This would exacerbate the downturn in
house prices, and force further credit losses onto banks’
balance sheets.
d
Export demand
down. There is a large oversupply of housing, and US house
New
Zealand
Vulnerabilities in the European
Source: RBNZ
financial system
Further problems in the US
At the outset of the current credit market problems, many
financial system and economy
observers were surprised by the extent to which European
The impact of the US economy on New Zealand through
direct trade channels is fairly limited. Only about 12 percent
of New Zealand goods exports (mostly agricultural) go to
the US, and 9 percent of visitors to New Zealand come
from the US. However, the US economy and financial
system have a strong influence via other trading partners,
and via global financial markets.
The US Federal Reserve’s official interest rate cuts and
provision of new liquidity facilities in the US money markets
have improved conditions in those markets (see chapter
4). However, credit markets more generally remain under
severe pressure, with the degree of pressure increasing on
many measures. If, as seems likely, related losses continue
financial institutions were exposed to US sub-prime related
assets. The ample liquidity conditions, credit derivative
product innovation, and buoyant markets of the past few
years have led to a similar relaxation of credit due diligence
in Europe as has been revealed in the US. Credit growth in
Europe has certainly been rapid, and stresses have already
been seen in several European financial institutions, such
as Northern Rock. The simultaneous strong house price
inflation in most developed economies has been due, in
part, to several years of this more relaxed credit culture.
Housing markets in Spain, the United Kingdom and Ireland
are currently correcting, and will further test the strength
of the European financial system.
to mount, access to credit around the world is likely to
deteriorate.
8
ReseRve Bank of new Zealand: Monetary Policy Statement, March 2008
The impact on Asia
Zealand commodity exports – have not risen anywhere near
The Asian region seems unlikely to generate a ‘shock’ of
as much in recent years as have those for dairy products.
its own, given the strong growth, large current account
Dairy prices might hold up to some degree in the face
surpluses, low real interest rates, and strong foreign reserves
of a global slump. They have been supported by market-
positions of the region’s major economies. Asian financial
specific and probably long-lasting factors such as bio-fuel-
institutions’ exposures to US mortgages, and indeed even
related demand, high grain prices, and secular changes in
to local mortgages, appear limited. The greater risk is
world consumption patterns driven by growing per capita
probably of stock market or commercial property market
incomes in large emerging economies.
corrections in strongly growing economies such as China’s
The international oil price is probably more sensitive
– but this risk at present does not appear to be particularly
to developed country (particularly US) developments than
heightened.
are soft commodity prices, but would also come under
Our current projection is based on limited trade-related
pressure if Asian growth slowed.
spillover to Asia from a growth slowdown in the US and
The direction of the overall effect on New Zealand
Europe. China’s growth, for example, is driven not only by
activity via the commodity price channel is difficult to
net exports boosting the coastal regions, but also by strong
pick. Falling commodity export prices would reduce farm
infrastructure investment in the interior. However, if the
incomes, but falling oil prices would boost real household
developed economies slump deeply, the risk becomes more
disposable incomes, all else equal.
real that falling Asian exports and associated financial stress
In the tourism and non-commodity goods exporting
substantially impede Asian domestic demand growth, and
sectors, reduced world demand would show up in volume
induce a generalised macroeconomic downturn in Asia. An
effects, rather than the price effects predominating in
Asian downturn could amplify a downturn in the major
the commodity-exporting sectors. Australian demand
developed economies by reducing the willingness of Asia’s
is probably the main transmission channel here, as it is
sovereign wealth funds to provide capital to the rest of the
the market that takes the largest share of New Zealand’s
world.
manufactured exports (about a third) and supplies almost
40 percent of all international visitors.
The impact on New Zealand
A global downturn, particularly if it included a material
Asian downturn, would flow through to New Zealand
mainly via reduced world prices for our commodity exports,
lower demand for manufactured exports (mainly via the
impact on Australia), and fewer tourists. There would
probably also be an intensification locally of the pressures
on credit markets already evident around the world, and a
sharp and deep fall in the exchange rate.
An Asian downturn would reduce the strong
demand that has underpinned high prices in international
commodity markets. The most relevant commodity markets
for New Zealand are dairy (23 percent of exports by value)
and crude oil (7 percent of imports by value). International
The Australian economy and financial system are
currently unlikely to generate shocks independently of
events in the rest of the world. As discussed in chapter
3, the Australian economy is presently in a very strong
state. However, Australia is exposed to global and Asian
growth for similar reasons to New Zealand. Its exposure to
the commodity markets is mainly with respect to the prices
of ‘hard’ commodities such as minerals and coal, rather
than ‘soft’ commodities as in New Zealand’s case. The
connection from commodity prices to activity in Australia
is somewhat weaker than in New Zealand’s case, because
Australia’s revenues from hard commodity exports accrue
mostly to multinational mining companies, rather than to
‘family farms’ as in New Zealand.
prices for meat and forestry products – the other main New
Reserve Bank of New Zealand: Monetary Policy Statement, March 2008
9
10
The global downturn in 2001 saw a large inflow to
in national and household debt loads over the past few
New Zealand of migrants and returning New Zealanders.
years and overvalued New Zealand house prices. Drought
The strong demand impulse from this inflow more than
or extended dry weather might add to local credit risks at
offset the effect of the downturn on trade. A global slump
the same time. The emergence of disorderly conditions in
that improved relative prospects in New Zealand might
the funding markets could add a local credit crunch on top
again induce expatriate New Zealanders to return home
of the trade-related effects of a global downturn.
and foreigners to migrate. However, any such migration
Finally, if New Zealand was expected to be seriously
response is unlikely to match the magnitude of the
affected by a global downturn, the exchange rate would
2002-03 inflows, which included a very sharp spike after
probably fall markedly, driven by a flight-to-quality attitude
the September 2001 terrorist attacks and large, apparently
among international investors. This risk aversion would
coincidental, flows of foreign English-language students.
probably dominate the recent sharp widening of expected
In a slump scenario with jittery world financial markets,
interest rate differentials. When the current credit market
deterioration in the local credit environment could impede
turmoil emerged in August last year, the value of the New
New Zealand banks’ continued access to the offshore
Zealand dollar dropped from about US80c to below US70c
markets on which they depend for funding and hedging.
in the space of a few days. Exchange rate depreciation
As discussed in the main part of this chapter, the offshore
would have the beneficial effect of cushioning commodity
credit market turmoil has already seen local bank funding
exporter incomes from commodity price falls, while
costs increase markedly. These increased credit concerns
supporting manufactured and services export demand.
come on top of a domestic environment of marked growth
However, it would also push up tradable inflation.
Reserve Bank of New Zealand: Monetary Policy Statement, March 2008
3
The recent economic situation
Overview
are creating headwinds for activity in these regions. To
New Zealand is now into its ninth year of largely
date, there has been little evidence that weaker activity has
uninterrupted economic expansion. This extended period of
spilled over into domestic demand in the Asia-Pacific region,
strength has been led by strong growth in domestic demand,
although conditions are changing rapidly.
underpinned by a buoyant housing market and a tight labour
The emergence of underlying inflation pressures in
market. Growth has generally outpaced the economy’s
some of our key trading partner economies has become
supply potential, resulting in a number of imbalances in the
problematic for some monetary authorities, who now have
economy and considerable pressure on resources.
to balance concerns about price stability against downside
While resource pressures intensified in late 2006, they
risks for activity.
did ease somewhat over 2007, partly reflecting interest
In addition to the rise in underlying inflation, headline
rate increases. Moreover, the housing market, which had
inflation rates have been exacerbated by rising food and fuel
been very buoyant over the previous five years, slowed
prices. Recent increases in world food prices (figure 3.1) have
dramatically over the second half of 2007, with house prices
largely been due to structural changes. Increased demand
now falling. Consumer confidence and retail spending
from developing countries, coupled with a shift in land use
growth also softened over 2007, although to a lesser extent
to bio-fuel production, has resulted in higher food prices,
than the downturn in the housing market.
such as for grain and dairy products. Climatic conditions and
Despite the moderate easing in GDP growth over
2007, resource pressures remain intense. Some measures
of capacity utilisation have increased. Strong employment
growth saw the unemployment rate reach a multi-decade
low of 3.4 percent, making it even more difficult for firms
to find labour.
supply shortages have also contributed to price rises.
Figure 3.1
Economist commodity price indices
(US$)
Index
350
Strength in tradable prices pushed CPI inflation to 3.2
300
percent in the December quarter. Higher food and petrol costs
250
have contributed significantly to tradable price pressure over
the past year. The current high cost environment has added
150
constrained. Indeed, excluding the effects of increased
100
tradable inflation remains elevated. An uptrend in inflation
300
Metals
250
200
pressure to domestic firms, who are already highly capacity
government subsidies for childcare and healthcare, non-
Index
350
200
Food
150
100
50
1995 1997 1999
Source: DataStream.
2001
2003
2005
2007
50
expectations and survey measures of pricing intentions over
recent years are also testament to the strength of current
price pressures.
Non-food commodity prices have also increased strongly
in recent years, reflecting strong growth, particularly in
developing nations. Although commodity prices, particularly
Global economic developments
Until recently, growth in New Zealand’s key trading partners
metals, have fallen over the past six months, prices remain
at very high levels.
has remained robust. The continued strength in Australia and
Asia (excluding Japan), which account for about 50 percent
of New Zealand’s exports, has been notable. However, other
trading partners are currently experiencing slowdowns in
activity, with a particularly sharp deceleration in the US.
Financial market volatility and tightening lending conditions
Reserve Bank of New Zealand: Monetary Policy Statement, March 2008
11
Australian GDP growth accelerated through 2007,
buoyed largely by strong domestic activity and a high terms
on top of 100 basis points last year. Fiscal policy is also set to
become more stimulatory.
of trade. Global commodity prices for Australian exports
The United Kingdom, eurozone and Japan have also
have generally stayed high, and contract prices for key
shown signs of weakening activity, with GDP growth
exports, such as coal and iron ore, are expected to increase
decelerating over 2007.
significantly. Growth in domestic demand has been broad
The slowdown in the United Kingdom economy has been
based, with consumer spending supported by a strong
led by a rapidly slowing housing sector, which prompted the
labour market, and business investment encouraged by tight
Bank of England to cut its policy rate by 25 basis points in
capacity pressures. Facing an increase in underlying inflation
early December.
pressures, the Reserve Bank of Australia (RBA) increased its
In the eurozone, although the labour market remains
policy rate by 25 basis points in February. Further, the RBA
firm and industrial orders have held up, weaker export
noted that significant slowing in demand would be needed
growth and softening consumer spending has weighed on
to alleviate inflation pressures. It indicated further tightening
GDP growth.
In Japan, surprisingly robust exports have supported
in policy might be necessary.
Activity in Asia (excluding Japan) has also continued
recent GDP growth. However, domestic demand remains
to show strength during 2007. Chinese GDP grew by
soft, industrial production has eased and surveys of business
11.2 percent over 2007, with domestic demand the main
sector activity have fallen.
contributor to growth. However, the rapid expansion of
the Chinese economy has raised concerns about inflation.
This has seen the introduction of additional price controls
for some goods, as well as further increases in China’s
official interest rate and bank reserve asset requirements.
Other economies in the region have also shown continued
strength in domestic activity. GDP has surprised on the
upside in South Korea; Hong Kong has seen continued
strength in retail sales; and in Taiwan, industrial production
Tradable sector activity
Over the past three years, strong trading partner growth
and favourable climatic conditions have supported exports.
This has provided some offset to the high level of the New
Zealand dollar. However, following strong agricultural-led
growth over 2006, overall export growth faltered in mid2007. This recent weakness in export growth has been
relatively broad based (figure 3.2).
has remained firm. While domestic activity has remained
firm across the region, there are signs that export demand
Figure 3.2
from the US and Europe is slowing.
Export volumes
Over most of 2007, US GDP growth held up around
average rates, as weakness in the housing market was offset
by firmer activity in other sectors. However, recently we have
seen, in addition to continued severe weakness in the housing
(seasonally adjusted)
95/96 $bill
5.5
95/96 $bill
4.2
Primary exports
5.0
market, more widespread signs of weakness in US activity.
Consumption growth slowed noticeably in the December
quarter. Further, consumer confidence has declined and job
3.2
4.5
4.0
Manufactured
exports (RHS)
Exports of services
(RHS)
growth has slowed, suggesting less support for household
spending going forward. Additionally, indicators of business
3.5
sector activity have declined. These developments, along
3.0
with recent turbulence in financial markets, have prompted
Source: Statistics New Zealand, RBNZ estimates.
1996
1998
2000
2002
2004
2.2
2006
1.2
a considerable easing in monetary policy, with the Federal
Reserve lowering interest rates by 125 basis points in January,
12
Reserve Bank of New Zealand: Monetary Policy Statement, March 2008
Exports of manufactured goods have continued to track
the dairy season. However, recent dry weather suggests that
sideways, despite showing some signs of recovery early in
this strength in commodity exports is likely to be short lived
2007. Likewise, the recovery in exports of services seen early
(see box D).
last year has not been sustained, with the number of visitor
Prices for New Zealand’s commodity exports increased
arrivals – particularly long-haul visitors – starting to decline
strongly over 2007, owing to an unprecedented increase in
later in 2007. Indeed, the recent slowing of activity in the US
international dairy commodity prices (figure 3.3, overleaf).
and Europe is likely to further weigh on exports of services
More recently, international prices for skim milk powders (20
and manufactured goods.
percent of dairy exports) have fallen back, offsetting some
Growth in exports of primary exports also faltered
improvement in prices of other commodities. Due to the
during 2007. However, trade data imply a strong recovery
use of supply contracts, merchandise trade data have only
in exports of commodity goods in the final quarter of 2007.
recently begun to fully reflect the rise in dairy prices seen in
Exports of petroleum increased as the Tui oil field reached
spot markets during 2007.
full production. Volumes of dairy exports also increased in
the December quarter, partly as a result of a strong start to
Box D
a result, slaughtering rates have increased markedly, with
The economic impact of the dry
many farmers killing stock early to conserve feed supplies.
summer
Following what was an already dry spring, much of the
country had only limited rainfall during the summer of
2007/08. This, combined with above-average temperatures,
saw soil moisture levels deteriorate noticeably in January, to
well below previous summer averages. These widespread
dry conditions could noticeably reduce economic activity
over the next few months.
Drier than normal conditions have been most obvious
in key dairy farming areas. Indeed, in what is believed to
be the first time ever, Environment Waikato declared the
Waikato region – in which about a third of New Zealand’s
dairy farms reside – to be in drought.
The resultant reduction in grass growth has seen
demand for supplements, including imported supplements,
increase markedly. While most supplements are supplied
on contract at prices negotiated some months earlier,
increased demand has seen spot feed prices spike higher.
Despite increased use of supplements, dairy production
has fallen below last year’s levels in recent weeks, with
While early slaughtering will provide a short-term fillip to
economic activity, for the season as a whole meat export
volumes are likely to suffer, reducing already depressed
sheep farm returns.
Limited rainfall has also seen lakes that are used for
hydroelectricity generation fall to well below average levels.
This has increased the risk that hydroelectric generators,
which typically provide about two-thirds of the country’s
electricity, will be unable to meet demand. Reflecting this
risk, current water shortages, along with disruptions to
generation at some non-hydro North Island power plants,
spot electricity prices have moved higher.
The extent to which dry conditions reduce economic
activity depends on the extent to which rainfall occurs over
the coming weeks and months. If dry conditions persist,
animal condition is likely to suffer, potentially reducing
agricultural production in the subsequent season.
In that regard, recent heavy rain throughout Canterbury
will have come as some relief to farmers in that region.
Similar rainfall would be welcome in other parts of the
country.
many farmers drying off poorer performing cows and
some moving to once-a-day milking.
Dry conditions have also developed, or in some case
intensified, in several sheep and beef farming areas. As
Reserve Bank of New Zealand: Monetary Policy Statement, March 2008
13
Figure 3.3
Figure 3.5
Nominal commodity prices
Current account balance, goods and services
Index
240
Index
240
World commodity
price index
200
200
160
160
120
120
NZ dollar commodity
price index
80
World commodity
price index (ex-dairy)
80
balances
(annual)
%of GDP
6
4
%of GDP
6
4
Goods balance
2
2
0
0
-2
-2
Services balance
-4
40
40
1995 1997 1999 2001 2003 2005 2007
Source: ANZ National Bank Group Ltd, RBNZ estimates.
-4
-6
-8
-6
Current account balance
-10
Import growth remained robust over 2007, supported by
1995
1997
1999
2001
Source: Statistics New Zealand.
2003
-8
2005
2007
-10
the high level of the exchange rate and continued strength
in domestic demand (figure 3.4). Much of the growth has
been due to strong imports of services, underpinned by
Domestic demand
large numbers of New Zealanders taking overseas holidays.
The momentum in domestic demand over the first half of
More recently, imports have held up surprisingly well, in
2007 now appears to have waned. The household sector
particular imports of consumption goods, in the face of
has shown very clear signs of weakness in recent quarters,
slowing domestic demand.
with deterioration most obvious in the housing market.
Household spending has also slowed, despite continued
Figure 3.4
strength in labour income growth. To date, growth in business
Import volumes
investment has remained robust. However, sentiment has
(seasonally adjusted)
95/96 $mill
13000
%
20
12000
15
investment growth later in the year.
Residential investment continued to rise over 2007
(figure 3.6), implicitly reflecting demand from increased
11000
10
10000
8000
Annual growth
(RHS)
7000
has now slowed, and working in combination with rising
0
mortgage rates, has led to a significant decline in housing
-5
Level
1995
1997
1999
2001
2003
2005
2007
net immigration earlier last year. However, net immigration
5
9000
6000
fallen in recent quarters and indicators suggest weaker
-10
Source: Statistics New Zealand.
demand. According to Real Estate Institute of New Zealand
(REINZ) data, house sales fell steadily over most of 2007.
By January 2008, house sales had declined 32 percent
compared to the previous year. Building consents have also
Over 2007, growth in imports of goods outpaced that of
exports, causing the earlier recovery in the goods balance to
begun to match the decline in house sales, indicating falling
construction activity over the end of 2007 and early 2008.
falter. This, combined with an increasing investment income
deficit, resulted in a current account deficit of just above 8
percent of GDP by late 2007 (figure 3.5).
14
Reserve Bank of New Zealand: Monetary Policy Statement, March 2008
Figure 3.6
months, annual growth should fall close to zero in the
Real residential investment and house sales
March quarter.
per-capita
Figure 3.8
(seasonally adjusted)
Real retail sales and consumer confidence
%of GDP
6.5
Residential investment
per thousand people
3.7
6.0
3.2
5.5
2.7
Annual growth %
10
Index
140
Westpac consumer
confidence
(adv 1 quarter, RHS)
8
Real retail sales
6
130
120
4
5.0
2.2
REINZ house sales
(adv 6 months, s.a., RHS)
4.5
1.7
0
4.0
1.2
-2
2000
2002
2004
2006
2008
Source: Statistics New Zealand, REINZ, RBNZ estimates.
110
2
Roy Morgan
consumer confidence
(adv 2 months, scaled, RHS)
100
90
1998
2000
2002
2004
2006
2008
Source: Statistics New Zealand, Westpac McDermott Miller, Roy
Morgan.
The marked decline in housing demand has resulted in
a sizable increase in the stock of unsold houses. The REINZ
Given the degree of slowing in the housing market,
measure of median days to sell rose to a six-year high of
which will have limited any further gains in housing wealth,
40 days (seasonally adjusted) in January. The slowdown in
it is somewhat surprising that consumer confidence has
housing demand has contributed to median house prices
not fallen by more. This is especially so considering that
falling over the past few months (figure 3.7).
confidence remains above mid-2006 levels when petrol
prices were around the same levels as they are currently.
Figure 3.7
However, the tight labour market might have supported
Median house prices
consumer confidence, with labour incomes growing strongly
(seasonally adjusted monthly percent change,
in the final quarter of 2007.
3 month moving average)
Business investment growth remained buoyant over
%
2.0
%
2.0
2007 as a result of a tight labour market, high exchange rate
1.5
1.5
and robust business confidence. Recent growth in business
1.0
1.0
0.5
0.5
0.0
0.0
asset investment also increased very strongly over recent
-0.5
-0.5
quarters, owing in part to the increase in oil exploration
-1.0
currently occurring in New Zealand.
investment has been broad based across sectors, including
continued strength in plant and machinery investment, non-
-1.0
Jul
Jan
Oct
Apr
2006
2007
Source: REINZ, RBNZ estimates.
Jul
Oct
Jan
2008
residential construction, and transport equipment. Intangible
However, more recently, falling profitability and
tightening credit conditions are weighing on business sector
The loss of momentum in the housing market has also
confidence. Despite evidence of capacity pressures remaining
affected consumer sentiment and retail sales (figure 3.8).
intense, investment intentions have now eased and
Core retail volumes essentially tracked sideways over the
surveyed profitability has declined, signalling a slowdown in
second half of 2007. As a result, annual growth in retail
investment growth later this year (figure 3.9).
volumes eased to 3.4 percent in the December quarter,
from almost 7 percent at the start of 2007. Further, without
significant growth in retail sales over the next couple of
Reserve Bank of New Zealand: Monetary Policy Statement, March 2008
15
Figure 3.9
Figure 3.11
Real market business investment and
Unemployment and labour force participation
profitability
%of labour force
8
Unemployment
(seasonally adjusted)
Annual growth %
30
20
Index
40
Business investment
%of working age population
69
Labour force
participation (RHS)
7
68
6
67
5
66
4
65
20
10
0
0
-10
Profitability
(adv 4 quarters, RHS)
-20
-20
3
1995
1997
1999
2001
2003
2005
2007
64
Source: Statistics New Zealand.
-30
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
Source: Statistics New Zealand, NZIER, RBNZ estimates.
-40
again, firms are reporting that finding labour has become
increasingly difficult. Indeed, the number of firms reporting
labour as the main limiting factor to production has
Productive capacity and the labour
increased to 20 percent, from just below 16 percent in
market
mid-2006. Tight labour supply has been exacerbated by
Spare capacity in the economy remains limited. Pressure on
falling net immigration, partly due to increased departures
resources remains intense, despite slowing GDP growth over
to Australia.
the second half of 2007 (figure 3.10). QSBO measures of
Ongoing tightness in the labour market has contributed
capacity utilisation and difficulty finding labour – both good
to substantial growth in labour incomes in recent years as
measures of capacity pressures – increased strongly in the
firms compete for scarce workers. Growth in total weekly
fourth quarter of 2007. In addition, the unemployment rate
earnings has been running at about 7 percent for about
reached a multi-decade low of 3.4 percent (figure 3.11).
four years (figure 3.12). And while employment growth has
slowed somewhat, wage inflation remains high. Growth
Figure 3.10
in the labour cost index (which attempts to exclude wage
Capacity measures and annual average GDP
changes attributed to productivity) has accelerated in recent
growth
quarters – to 3.4 percent in annual terms.
(seasonally adjusted)
Normalised
2
1
%
8
Skill shortages
6
0
4
-1
-2
Figure 3.12
Labour costs and wages – private sector
(annual percent change)
%
3.5
2
GDP (RHS)
Capacity utilisation
0
-3
-2
-4
-4
%
9
QES total weekly
gross earnings (RHS)
8
3.0
7
6
2.5
5
1990 1992 1994 1996 1998 2000 2002 2004 2006
Source: Statistics New Zealand, NZIER, RBNZ estimates.
Continued strength in employment growth has seen
the supply of labour become extremely stretched. The
pool of available workers has been declining, as reflected
2.0
1.5
4
3
LCI wage index
2
1.0
1995
1997
1999
2001
Source: Statistics New Zealand.
2003
2005
2007
1
by the continued fall in long-term unemployment. Once
16
Reserve Bank of New Zealand: Monetary Policy Statement, March 2008
Inflation expectations
Figure 3.14
Aside from some exchange rate and fuel cost induced
CPI inflation, pricing intentions, and average
volatility during 2006, inflation expectations have continued
costs
to trend up over recent years, and now sit firmly within the
%
5
QSBO average
selling prices
(adv 2 quarters, RHS)
top quarter of the 1 to 3 percent target range (figure 3.13,
4
table 3.1).
Longer-term inflation expectations
1
0
2
-1
(annual)
%
3.0
%
3.0
n
2.5
2
QSBO average
costs (adv 1
quarter, RHS)
3
Figure 3.13
Normalised
3
CPI inflation
1
-2
0
RBNZ 2-year-ahead survey
2.5
1995
1997
1999
2001
2003 2005
2007
Source: Statistics New Zealand, NZIER, RBNZ estimates.
-3
Figure 3.15
2.0
2.0
AON 4-year-ahead survey
1.5
1.0
1995
1997
1999
2001
2003
2005
1.5
2007
1.0
CPI, tradable, and non-tradable inflation
(annual)
%
6
%
6
Non-tradable
4
4
Source: RBNZ, Alexander Consulting.
CPI
Inflation
Underlying
inflationary
pressures
remain
persistent,
2
2
0
0
-2
-2
Tradable
underpinned by intense resource pressures and rising
inflation expectations. As a result, firms continue to face
-4
higher costs, including elevated wage, commercial rent,
Source: Statistics New Zealand.
1995
1997
1999
2001
2003
2005
2007
-4
and energy costs. In addition to strong domestic resource
pressures, international prices of raw materials have
this increase was a strong contribution from food and petrol
increased dramatically over 2007 and early 2008. In the face
prices.
of rising costs, there is considerable pressure on margins,
The increase in petrol prices largely reflected the moves
and pricing intentions have remained elevated (figure 3.14).
in international markets, with some offset from the use of
Annual CPI inflation rose to 3.2 percent in the December
supermarket docket discounts. The increase in food prices
quarter, from 1.8 percent in the previous quarter (figure 3.15).
at the consumer level also largely reflected movements in
Over early 2007, the deflationary effects of the appreciating
international prices. Higher prices of dairy products were
New Zealand dollar and falling petrol prices had masked
prominent in the most recent increase in food prices.
underlying inflation pressures. However, these underlying
However, in a more general context, the increase in food
inflation pressures can be seen in elevated measures of core
prices has been reasonably broad based. Annual food price
inflation, such as the trimmed mean and weighted median.
inflation has been rising for a number of years (figure 3.16),
Underpinning the December quarter increase in inflation
and recent trends in world food prices have added to this
was a rise in annual tradable inflation, which increased to
momentum.
2.8 percent from 1.8 percent in the previous quarter. Behind
Reserve Bank of New Zealand: Monetary Policy Statement, March 2008
17
Figure 3.16
Figure 3.17
Food price inflation
Non-tradable inflation excluding subsides
(annual)
(annual)
%
8
%
8
6
6
%
5
%
5
4
4
4
Non-tradable
inflation
4
Non-tradable
inflation
ex subsides
3
2
2
0
0
-2
1995
1997
1999
2001
2003
2005
2007
-2
Source: Statistics New Zealand.
2
2
1
3
1995
1997
1999
2001
2003
2005
2007
1
Source: Statistics New Zealand, RBNZ estimates.
While tradable inflation accelerated in late 2007, annual
non-tradable inflation eased slightly, due to the introduction
of healthcare and childcare subsidies. Excluding these
subsides, annual non-tradable inflation remains elevated
(figure 3.17).
18
Reserve Bank of New Zealand: Monetary Policy Statement, March 2008
Reserve Bank of New Zealand: Monetary Policy Statement, March 2008
19
1
2.9
2006
Sep
2.8
1.6
Jun
CPI ex food, petrol and government charges
CPI ex energy and fuel
GDP deflator (derived from expenditure data)
3.3
2.3
3.1
2.4
Due to a reweighting of the Consumers Price Index, these series are only available on a consistent basis from September 2006 onwards.
3.4
2.4
3.2
2.5
3.2
2.5
2.5
2.6
3.1
2.6
2.8
2.7
n/a
2.6
3.1
2.7
3.2
2.7
2.6
2.3
2.4
2.6
NBBO – inflation one-year-ahead (quarterly average)
2.7
2.7
AON Economist survey – inflation four-years-ahead
3.2
2.9
3.0
3.0
2.7
2.7
AON Economist survey – inflation one-year-ahead
2.7
Mar
2008 RBNZ Survey of Expectations – inflation two-years-ahead
2.7
Dec
n/a
2.3
2.0
3.2
3.0
Sep
3.8
2.2
1.9
2.7
3.0
3.5
Jun
4.1
2.5
2.1
2.4
3.5
3.2
Mar
3.0
2.8
2.7
2.9
2.3
RBNZ Survey of Expectations – inflation one-year-ahead
Dec
2.9
2.7
2.5
2.6
2.0
Inflation expectation measures
2.8
2.7
n/a
2.8
CPI weighted median (of annual price change)1
2.4
2.7
16.9
2.8
3.0
4.9
3.5
3.2
Dec
2.9
2.6
2.3
-5.9
-0.3
3.1
4.9
3.7
1.8
Sep
3.0
2007
2007 n/a
2.5
-8.4
-0.5
3.9
4.7
4.1
2.0
Jun
CPI trimmed mean (of annual price change)1
2.6
-2.8
0.9
3.8
4.7
4.1
2.5
Mar
2.7
2.9
1.3
1.2
3.7
4.2
3.8
2.6
Dec
3.0
15.9
Factor model estimate of core CPI inflation
32.2
Petrol
3.0
3.9
4.5
4.0
3.5
Sep
2006
Other inflation measures
3.8
3.9
Non-tradable ex housing, cigarettes and tobacco components
CPI tradables
4.6
Non-tradable housing components
CPI non-tradables
4.1
4.0
CPI
CPI Components
Jun
(annual)
Measures of inflation and inflation expectations
Table 3.1
4
Financial market developments
International markets
Figure 4.2
Fragile risk appetite has seen ongoing volatility in global
Financial market expectations of international
equity, foreign exchange, bond and money markets. From
policy rates
their origins in the US sub-prime mortgage market, credit
%
6.0
market problems have now spread to a vast range of
financing activities around the world.
5.5
Expectations
%
6.0
5.5
US
5.0
5.0
Many of the structured credit product markets that have
4.5
provided an important source of funding for a wide range of
4.0
enterprises and activities in recent years are now no longer
3.5
functioning. Even markets for highly-rated corporate debt
3.0
securities have been undermined by fears regarding illiquidity
2.5
and valuation uncertainties in the current environment
2.0
Jan06
(figure 4.1). Moreover, the lending capabilities of many
Source: Reuters, RBNZ estimates.
4.5
UK
4.0
3.5
Eurozone
3.0
2.5
2.0
Jul06
Jan07
Jul07
Jan08
Jul08
financial institutions have become increasingly constrained,
particularly after they have had to absorb credit products
The market also expects further easing in the United
previously held by off-balance sheet vehicles and write down
Kingdom, where the Bank of England cut its policy rate in
the value of assets. These developments have reinforced fears
December and again in February. The European Central Bank
that the increased cost and reduced availability of credit will
(ECB) has left its policy rate unchanged since last raising it in
be a lasting impediment to global economic activity.
2007 and continues to express concern regarding inflation.
Regardless, the market is pricing in a high probability of the
Figure 4.1
ECB cutting its policy rate over the year ahead.
The spread between US corporate and
In contrast, some of New Zealand’s other major trading
government bond yields
Basis points
450
Basis points
450
partners have had monetary policy tightened in recent
360
Reserve Bank of Australia (RBA) to raise its policy rate further
360
in early 2008. The RBA also warned that policy is likely to
BBB
270
270
A
180
months. Strengthening inflation pressures prompted the
180
need to be tighter, and the market is pricing in further rate
rises (figure 4.3). Similarly, inflation concerns saw Chinese
authorities continue to tighten policy during late 2007 by
90
90
AAA
0
1999
2001
Source: Bloomberg.
2003
2005
2007
0
raising interest rates and bank reserve asset requirements.
Global short-term funding markets have remained under
pressure. Spreads between interbank rates (LIBOR and bank
bill) and expected policy rates (as measured by overnight
In response to these financial system stresses and other
downside risks to US economic growth, the US Federal
Reserve has continued to lower its policy rate during the past
few months. It has now reduced its policy rate by a total of
225 basis points since it began easing in September last year,
and the market is pricing in further US rate cuts over the
months ahead (figure 4.2).
index swap (OIS) rates) widened again in December (figure
4.4), as usual year-end-related preferences for cash relative
to security holdings were accentuated by credit fears. The US
Federal Reserve, in conjunction with a range of other major
central banks, responded by establishing a Term Auction
Facility to provide funds to financial institutions at more
favourable rates and for longer terms than usually available
through their standard liquidity operations. This helped to
20
Reserve Bank of New Zealand: Monetary Policy Statement, March 2008
Figure 4.3
Figure 4.5
Financial market expectations of the Australian
Equity indices
policy rate
(1 January 2007 = 100)
%
8.0
Expectations
%
8.0
Index
130
7.5
7.0
7.0
6.5
6.5
110
100
100
90
6.0
80
5.5
5.5
70
5.0
Aug06
Feb07
Aug07
Feb08
Aug08
Source: Reuters, RBNZ estimates.
120
110
6.0
5.0
Feb06
Australia
(All Ords)
US
(S&P 500)
120
7.5
Index
130
90
NZ
(NZSE)
80
Japan
(Nikkei)
60
Jan07 Mar07 May07 Jul07 Sep07 Nov07 Jan08
Source: Bloomberg, RBNZ.
70
60
Despite the turmoil in other markets, there has been
Figure 4.4
further strength in a range of commodity prices since the
Spreads between three-month LIBOR and OIS
December Statement. This has partly reflected ongoing
rates
Basis points
160
Basis points
160
weakness in the US dollar (as discussed below), which is
the currency of denomination for global trading in most
commodities. Of particular note, oil prices have reached
UK
115
115
US
reached new highs when denominated in other currencies
EU
70
new highs above USD100 per barrel. However, oil has also
70
(figure 4.6), highlighting the extent to which supply and
demand pressures continue to underpin prices.
NZ
25
25
AU
-20
-20
Jan07 Mar07 May07 Jul07 Sep07 Nov07 Jan08
Source: Bloomberg.
Note: Bank bill rates are used in instead of LIBOR in the case
of New Zealand and Australia.
Figure 4.6
Oil prices
(West Texas Intermediate)
Price per barrel
110
Price per barrel
110
100
alleviate money market pressures to some extent. However,
LIBOR-OIS spreads remain relatively wide compared to the
levels prevailing before August last year.
Global equity markets have remained under pressure
since the December Statement (figure 4.5). Ongoing
announcements of credit product related losses have seen
financial stocks continue to lead the weakness. However,
fears about the US economic outlook have also undermined
100
90
90
USD
80
60
60
50
50
Euro
40
40
30
30
20
20
SDR
10
0
1989
80
70
70
10
0
1992
1995
1998
2001
2004
2007
Source: Bloomberg, RBNZ.
stocks in other sectors. Following further US policy rate cuts
in late January, US equity markets have stabilised to some
extent. However, the Australian and New Zealand markets
have continued to weaken.
Reserve Bank of New Zealand: Monetary Policy Statement, March 2008
21
Exchange rates
Figure 4.8
The US dollar has continued to weaken against
TWI and relative interest rate expectations
a broad range of currencies since the December
Statement (figure 4.7). Ongoing US policy rate cuts and
Index
550
85
500
expectations of further easing has seen higher-yielding
80
currencies – including both the New Zealand and Australian
75
dollars – appreciate to new post-float highs against the US
dollar. A notable exception to this broad-based strength
Basis points
90
450
Relative interest rate
expectations (RHS)
70
400
350
65
300
60
against the US dollar has been the British pound, which has
55
weakened following Bank of England interest rate cuts in
50
recent months.
45
150
2000 2001 2002 2003 2004 2005 2006 2007 2008
Figure 4.7
Currencies against the US dollar
Index
125
Australian
dollar
120
115
New Zealand dollar
110
Index
125
Euro
100
British pound
Japanese yen
Source: Bloomberg, RBNZ estimates.
Note: This measure of relative interest rate expectations is the
spread between bank bill futures rates in New Zealand
and a TWI-weighted average of futures rates in the US,
Europe, Australia, Japan and UK.
A further illustration of the generalised reduction in risk-
115
taking is the lower level of speculative net long positions
105
100
95
200
120
110
105
250
NZD TWI
in the New Zealand dollar (figure 4.9). Net ‘long’ positions
(ie traders positioned to gain from an appreciation in the
currency) are considerably lower than when the NZD/USD
was last at these levels.
95
90
90
Jan07 Mar07 May07 Jul07 Sep07 Nov07 Jan08 Mar08
Source: Bloomberg, RBNZ.
Figure 4.9
Speculative positioning in the New Zealand
dollar
Appreciation in the New Zealand dollar continues to
be less than might have been expected on the basis of
movements in relative interest rate expectations (figure 4.8).
As discussed in the December Statement, it appears a larger
USD
0.85
20
0.75
‘risk premium’ is being applied to the New Zealand dollar
at present, with traders reluctant to take large positions in
0.65
25
Net long position (RHS)
0.80
0.70
currencies on the periphery of global markets in the current
'000 contracts
30
NZD/USD
15
10
5
0.60
0
environment. As such, the current situation appears to have
some similarities to the experience during 2002. In a similar
0.55
Jan06
environment of elevated risk aversion and market volatility,
Source: Bloomberg, RBNZ.
the New Zealand dollar rose by less than might otherwise
have been expected on the basis of relative interest rate
expectations.
Jul06
Jan07
Jul07
Jan08
-5
However, there has been some renewed strength in
issuance of Eurokiwi and Uridashi bonds in early 2008 (figure
4.10). As recent issuance has closely matched maturities,
the amount of these bonds outstanding has stabilised in
the past couple of months, after falling during the second
half of 2007. Market contacts have suggested Uridashi
bonds have started to come back into favour, with Japanese
22
Reserve Bank of New Zealand: Monetary Policy Statement, March 2008
investors looking for alternatives to volatile equity markets.
Figure 4.11
However, lower-yielding currencies – notably the Japanese
90-day bank bill rates and three-month OIS rates
yen – have generally appreciated against the US dollar since
%
9.5
the December Statement, with heightened risk aversion and
volatility restraining carry trade activity.
9.0
Figure 4.10
bonds
$billion
60
4
3
Issues
Outstanding
(RHS)
40
1
0
-1
-2
-3
-4
-5
50
1996 1998 2000 2002 2004 2006 2008 2010
Source: Bloomberg, Reuters, RBNZ.
40
90-day bank
bill rate
7.5
20
7.0
Jan06
Jul06
Source: Reuters, RBNZ.
Jan07
Jul07
Jan08
0
30
Longer-term wholesale (swap) interest rates are currently
20
around the levels prevailing at the time of the December
10
Maturities
60
3-month
OIS rate
8.0
$billion
5
80
Spread (RHS)
8.5
New Zealand dollar-denominated offshore
2
Basis points
100
0
Statement (figure 4.12). In the absence of any material
change in OCR expectations, the New Zealand yield curve
has reflected the contrasting influences of key offshore
markets, with higher Australian longer-term interest rates
offsetting lower US longer-term rates.
Domestic markets
Figure 4.12
New Zealand interest rate markets continue to price in
The wholesale interest rate curve
little chance of a change in the OCR over the coming year.
%
9.0
Basis points
20
Nevertheless, in line with developments offshore (discussed
earlier), there has been ongoing volatility in short-term
Current
8.6
interbank (bank bill) rates in recent months (figure 4.11). As
in many other countries, New Zealand interbank rates rose
10
As at the
Dec MPS
0
8.2
towards the end of the year. The Reserve Bank responded
by widening the range of securities that would be accepted
-10
7.8
Net change
(RHS)
in open market operations and adjusting the settlement
cash level. While bank bill rates still remain relatively
elevated compared with the current level of – and market
expectations for – the OCR, they have fallen from the highs
seen in late 2007.
7.4
90d 180d 1yr
2yr
3yr
4yr
5yr
7yr
10yr
-20
Source: Bloomberg, RBNZ.
Despite swap rates being little changed from the levels
prevailing at the time of the December Statement, there
have been further rises in the fixed mortgage rates being
offered to new borrowers and those facing re-pricing of
existing mortgage debt (figure 4.13). Moreover, floating
mortgage rates have also increased slightly. These rate
increases appear to reflect the funding pressures banks have
faced in local and offshore markets in recent months.
Reserve Bank of New Zealand: Monetary Policy Statement, March 2008
23
Figure 4.13
Global funding and credit market pressures have
Mortgage rates offered to new borrowers
continued to push up funding costs for local corporate
%
12
%
12
11
11
10
10
Floating
5-year fixed
9
9
8
8
7
7
2-year fixed
6
5
1995
1997
1999
2001
2003
2005
in the local market, which has occurred at relatively high
rates above bank bill yields in recent months (figure 4.15).
Figure 4.15
Spreads between commercial paper and bank
bill rates
Basis points
30
6
2007
borrowers. This is illustrated by commercial paper issuance
Basis points
30
5
20
20
Source: RBNZ.
Against this backdrop, the effective mortgage rate – the
10
A2 rated issuance
10
average rate being paid on outstanding mortgage debt –
has continued to rise. The effective mortgage rate has now
increased by about 160 basis points from its lows in late
2003 and has reached its highest level since October 1998
(figure 4.14). Almost 30 percent of the existing mortgage
0
0
A1 rated issuance
-10
2002
2003
2004
Source: Reuters, RBNZ.
2005
2006
2007
-10
debt on fixed rates (representing close to a quarter of all
mortgage debt) will re-price over the next 12 months,
from an average rate of just above 8 percent. On the basis
of currently available mortgage rates, on average these
borrowers will face interest rates that are 70 to 150 basis
points higher than they are currently paying. This prospect
suggests the effective mortgage rate will continue to rise
over the next 12 to 18 months.
Figure 4.14
OCR and effective mortgage rate
%
10
%
10
Projection
9
8
9
Effective mortgage rate
8
7
7
6
6
5
5
Official Cash Rate
4
1999
2001
Source: RBNZ.
24
2003
2005
2007
2009
4
Reserve Bank of New Zealand: Monetary Policy Statement, March 2008
5
The macroeconomic outlook
Overview
pressures are expected to ease. However, the current high
The outlook for global economic activity is weaker relative
cost environment faced by firms poses upside risk to the
to the December projection. Prospects for growth in the US
outlook for domestic pricing pressures. Wage and energy
have diminished and risks of a more pronounced slowdown
cost increases are expected to remain high in the near term,
in New Zealand’s other major trading partners have also
with the inflationary effects of the emissions trading scheme
increased. The potential for negative ramifications for New
adding further to cost pressures from 2009.
Zealand exporters are compounded in the near term by
recent dry conditions throughout much of the country, and
World outlook
the still high New Zealand dollar.
In line with February Consensus forecasts, world growth is
Domestically, the outlook for household sector activity
projected to dip just below its average of the past decade
has deteriorated markedly. A pronounced slowing in housing
over the course of 2008, driven by a weaker outlook for
activity and house prices is anticipated, and growth in
activity in the US and more subdued growth in Europe (table
consumer spending is expected to remain subdued through
5.1, figure 5.1).1 Despite the significantly weaker outlook,
the projection. Increasing effective mortgage interest rates,
US growth is still expected to remain positive throughout the
rising consumer prices, and weaker farm production are
projection, reflecting recent loosening in monetary policy,
expected to constrain households’ spending power. In
increased fiscal stimulus from mid-2008, and improved
addition, low rates of net immigration are also expected to
prospects for exports.
weigh on consumption over the medium term. However,
Across the Asia-Pacific region, activity is forecast to
extremely tight labour market conditions, a high terms of
remain relatively firm, with only limited spillover from weaker
trade, and expectations of future personal tax cuts should
growth in the US and Europe. In particular, the outlook for
help to buoy spending growth to some extent. Strength in
a number of emerging markets remains encouraging, and
government spending is also anticipated to contribute to
domestic demand growth is expected to continue at robust
growth throughout the projection.
rates in Australia given the elevated terms of trade, healthy
In the wake of weaker household sector activity, GDP
labour market and supportive fiscal policy. Reflecting the
growth is projected to soften, with a subsequent easing
strength in these economies, the projected trough in global
in capacity constraints. As a result, non-tradable inflation
growth is muted by historical comparison. However, risks are
Table 5.1
Forecasts of export partner GDP*
(calendar year, annual average percent change)
Country
Australia
Asia ex-Japan***
United States
Japan
Eurozone**
United Kingdom
Canada
12 Country Index
*
** *** 2003
2004
2005
2006
2007f
2008f
2009f
3.0
5.3
2.5
1.5
0.8
2.8
1.9
2.8
3.9
7.6
3.6
2.7
1.8
3.3
3.1
4.1
2.8
6.7
3.1
1.9
1.6
1.8
3.1
3.3
2.8
7.4
2.9
2.4
2.9
2.9
2.8
3.7
3.9
7.6
2.2
1.8
2.6
3.1
2.6
3.9
3.5
6.7
1.6
1.4
1.6
1.7
1.8
3.2
3.3
6.8
2.6
1.9
1.9
2.0
2.5
3.5
Source: Consensus Economics Inc.
Includes Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Netherlands, Portugal and Spain.
Includes China, Hong Kong, Malaysia, Singapore, South Korea and Taiwan.
1
Reserve Bank of New Zealand: Monetary Policy Statement, March 2008
‘World growth’ is an export-weighted average of the
growth in New Zealand’s 12 major trading partners.
25
Figure 5.1
Figure 5.2
Trading partner GDP
Real world commodity export prices
(annual average percent change)
(deflated using world CPI)
%
6
Index
0.65
5
5
0.60
0.60
4
4
0.55
0.55
3
3
0.50
0.50
2
2
0.45
0.45
1
0.40
0.40
0
0.35
%
6
Australia
1
Projection
GDP12
United States
0
1995 1997 1999 2001 2003 2005 2007 2009
Source: Consensus Economics Inc, RBNZ estimates.
skewed to the downside, particularly over the medium term
Projection
1995 1997 1999 2001 2003 2005 2007 2009
Index
0.65
0.35
Source: Consensus Economics Inc., ANZ National Bank Group
Ltd, RBNZ estimates.
line with the profile implied by Consensus forecasts, we have
(see box C, chapter 2).
Despite the anticipated dip in world growth, positive
assumed oil prices remain around these levels over the first
prospects for activity in Australia should help underpin
half of 2008, before moderating towards levels consistent
demand for New Zealand’s manufactured exports. Strength
with our broad estimates of the cost of accessing oil reserves
in emerging markets is also expected to ensure global
(figure 5.3).
commodity prices remain elevated. As a result, our projection
does not incorporate a large negative effect on New
Zealand’s export commodity prices. Any further contagion
from a weaker Western world through to the Asia-Pacific
Figure 5.3
Dubai oil price
USD/barrel
100
region would have a more detrimental effect on the New
Zealand economy.
The terms of trade
After reaching record highs in mid 2007, New Zealand’s
export commodity prices have softened in recent months.
USD/barrel
100
Projection
80
80
60
60
40
40
20
20
0
0
We expect prices to continue to moderate in the near term,
with the downward momentum already seen in international
dairy prices expected to persist. However, with upbeat
1995 1997 1999 2001 2003 2005 2007 2009
Source: Datastream, RBNZ estimates.
demand through Asia, subdued Australasian production,
Total import prices are projected to track sideways
and ongoing bio-fuel related demand underpinning prices,
over the projection, with an increase in ex-oil import prices
we expect New Zealand’s commodity export prices to remain
offsetting the assumed decline in the price of oil imports.
above average levels in real terms (figure 5.2). Even with the
Consequently, the terms of trade increases through early
weaker near-term outlook for international prices, the use
2008 in tow with rising export prices, before softening
of forward contracts by exporters is expected to ensure dairy
further out in the projection (figure 5.4).
sector export receipts hold up over the coming year.
Ongoing demand from emerging markets should
support global commodity prices more broadly. Dubai oil
prices have recently increased to above USD90 per barrel. In
26
Reserve Bank of New Zealand: Monetary Policy Statement, March 2008
Figure 5.4
growth has been hampered by the negative effects of recent
OTI terms of trade, world export and import
dry conditions in key agricultural areas (see box D, chapter
prices (goods)
3) and weaker projections for world activity.
Ratio
1.4
Index
0.9
production deteriorate. In addition, while increased slaughter
Projection
1.3
0.8
World export prices (RHS)
1.2
1.1
0.7
Terms of trade
0.6
1.0
0.9
0.5
World import prices (RHS)
0.8
1995 1997 1999 2001 2003 2005 2007 2009
Source: Statistics New Zealand, RBNZ estimates.
Low rainfall has seen the near-term outlook for dairy
0.4
will boost meat exports in the very near term, the outlook for
meat production is more muted. If the current dry conditions
persist, we would expect to see a more prolonged downturn
in agricultural production.
With world growth expected to slow over the coming
year, the outlook for service and manufactured exports
growth is subdued. However, relatively robust domestic
demand in Australia provides more impetus to the outlook
for manufactured exports than would otherwise be the
Exchange rate
case. Overall, following the dairy and oil-related rebound
The exchange rate is assumed to remain relatively well
in exports in late 2007, export volumes as a share of GDP
supported over the projection, given strength in the terms
are expected to track sideways throughout the projection
of trade, and wide interest rate differentials (see chapter 4).
(figure 5.6).
Nonetheless, with global risk aversion elevated, and growth
prospects in New Zealand deteriorating, the New Zealand
dollar TWI is assumed to depreciate gradually through the
projection (figure 5.5).
Figure 5.6
Total export volumes (goods and services)
(percent of trend output and annual average
percent change)
Figure 5.5
%
35
Nominal TWI assumption
34
Index
75
Index
75
Projection
70
65
70
65
%share
Projection
33
55
60
55
50
50
45
45
1995 1997 1999 2001 2003 2005 2007 2009
Source: RBNZ estimates.
8
6
32
4
31
2
30
60
%
10
0
29
AAPC (RHS)
28
1995 1997 1999 2001 2003 2005 2007 2009
Source: Statistics New Zealand, RBNZ estimates.
-2
Import volumes and the current
Export volumes
Strength in the New Zealand dollar has dampened export
growth over recent years. However, most recently, a rebound
in dairy exports and the start of Tui oil production has
provided a boost to export growth. The outlook for export
account
An elevated exchange rate and strong domestic economic
activity have supported import demand over the past
few years. Import volume growth is projected to flatten,
consistent with an outlook of slowing domestic demand
Reserve Bank of New Zealand: Monetary Policy Statement, March 2008
27
growth and an assumption of a gradual fall in the New
outlook. However, given real household disposable incomes
Zealand dollar.
are projected to continue growing, housing affordability also
This relatively muted outlook for import growth, coupled
improves. Nevertheless, the ratio of house prices to average
with strength in exports, leads to an improvement in the trade
disposable incomes remains historically high throughout
balance through 2008. The investment income balance is
the projection, highlighting the risk of more pronounced
also set to improve as weaker prospects for domestic activity
weakness in house prices, particularly if other economic
reduce income accruing to foreign investors. However, in the
drivers prove weaker than expected.
near term, high interest rates and payments to the foreign
owners of the Tui oil field cause the investment income
deficit to widen temporarily before improving later in the
projection. Consequently, the current account deficit widens
slightly over 2009 before gradually improving to reach close
Figure 5.8
House price inflation
(annual)
%
25
Projection
%
25
to 7 percent of GDP by the end of the projection (figure
20
20
5.7).
15
15
10
10
Current account balance
5
5
(annual)
0
0
-5
-5
-10
-10
Figure 5.7
%of GDP
6
4
Trade balance
%of GDP
6
Projection
4
2
2
0
0
-2
-2
Current account balance
-4
-4
-6
-6
-8
-8
Investment income balance
-10
-10
1995 1997 1999 2001 2003 2005 2007 2009
Source: Statistics New Zealand, RBNZ estimates.
1995 1997 1999 2001 2003 2005 2007 2009
Source: Quotable Value Limited, RBNZ estimates.
A weaker outlook for house prices, coupled with a drop
in residential building consent issuance in December, and
declining housing turnover, are likely to weigh on residential
investment through 2008. However, with little evidence that
the housing sector is currently over-supplied, the forecast
dip in residential investment is relatively muted. Nonetheless,
real residential investment as a proportion of GDP remains
House price inflation and residential
Risks for residential investment are skewed to the
investment
Recent
household
below average throughout the projection (figure 5.9).
sector
developments
suggest
a
downturn in housing market activity and prices is now well
downside. Rising building costs (relative to existing house
prices) and high mortgage rates might lead to an even
deeper decline in residential investment. In addition, more
established.
In line with recent weakness across many housing
market indicators, house prices are expected to decline
muted net immigration than currently forecast would further
reduce demand for residential buildings.
through 2008 and are forecast to remain below current
levels throughout the remainder of the projection. Recent
and prospective increases in the effective mortgage rate,
lower projections for net immigration, and a projected rise
in unemployment all contribute to the weaker house price
28
Reserve Bank of New Zealand: Monetary Policy Statement, March 2008
Figure 5.9
Figure 5.10
Residential investment
Real household consumption
(percent of trend output and annual average
(percent of trend output and annual average
percent change)
percent change)
%
30
%
64
6.5
20
63
6.0
10
62
5.5
0
61
-10
60
-20
59
1
-30
58
0
%
7.0
AAPC (RHS)
Projection
5.0
4.5
%share
4.0
1995 1997 1999 2001 2003 2005 2007 2009
Source: Statistics New Zealand, RBNZ estimates.
AAPC (RHS)
Projection
%
7
6
5
%share
4
3
1995 1997 1999 2001 2003 2005 2007 2009
Source: Statistics New Zealand, RBNZ estimates.
2
Consumption
Labour market and net immigration
Increased evidence that a housing market correction is
Already very tight labour market conditions have intensified
under way suggests consumer spending will be weaker than
over recent months; the unemployment rate fell to a new
was projected in December. Consumption growth is forecast
multi-decade low in December, and measured wage price
to drop early in 2008 and to remain around 11/4 percent
inflation surged. Pressure in the labour market is expected to
in annual average terms throughout the projection (figure
persist in the near term, reflecting reports of ongoing labour
5.10). In addition to the negative effect on consumption
shortages, and stretched labour supply. Adding to supply
from a weaker housing market, a reduction in population
shortages, we expect net immigration to remain at very
growth due to lower net immigration supports a view of
low levels. Indeed, evidence of an uptrend in permanent
muted spending growth. Additionally, current strength in
and long-term departures, particularly to Australia, has re-
consumer prices, future cost increases from the emissions
emerged in recent months. With arrivals expected to track
trading scheme, and the effect of dry conditions on farm
sideways, net immigration is unlikely to recover any time
production will dampen consumers’ real disposable incomes
soon (figure 5.11). We have therefore revised down our
and consequently their consumption demand. At the same
projection for net immigration. The risk of an even more
time, tighter credit conditions will further pressure the ability
pronounced pick-up in permanent and long-term departures
of consumers to fund future spending.
has intensified as the prospects for growth in New Zealand
Providing some offset to these significant negative
deteriorate relative to those in Australia.
pressures, a tight labour market supports consumption in
the near term. The sizeable income boost from high terms
of trade, and prospects for future tax cuts, will also continue
to buoy consumer spending.
Reserve Bank of New Zealand: Monetary Policy Statement, March 2008
29
Figure 5.11
Business investment
Net permanent and long-term immigration
Elevated capacity constraints, rising wage costs and the
(annual total)
000s
50
high level of the exchange rate have supported an extended
000s
50
period of high business investment. Growth in business
40
40
investment is expected to remain positive over the coming
30
30
20
20
10
10
0
0
Projection
-10
-10
-20
-20
1995 1997 1999 2001 2003 2005 2007 2009
Source: Statistics New Zealand, RBNZ estimates.
year (figure 5.13). Elevated investment intentions support
this near-term outlook, with an impending reduction in the
corporate tax rate and increased tax credits providing some
support to investment.
Figure 5.13
Business investment
(excluding computers and intangible assets,
percent of trend output and annual average
Providing some relief to the severe labour shortages,
high wage inflation is expected to support labour force
percent change)
%
14
Projection
participation. We now expect labour force participation
to hold at historically high levels for longer. Even so, the
unemployment rate is expected to remain below 4 percent
%
15
13
10
12
5
until mid-2009, before trending higher as capacity constraints
across the broader economy ease (figure 5.12).
11
Figure 5.12
10
-5
%share
Unemployment rate
%
10
0
AAPC
(RHS)
9
Projection
%
10
8
8
6
6
4
4
1995 1997 1999 2001 2003 2005 2007 2009
Source: Statistics New Zealand, RBNZ estimates.
-10
However, as weaker domestic demand is expected to
contribute to a reduction in capacity constraints over the
projection, the need for further investment is reduced,
and business investment is subsequently projected to fall.
2
1995 1997 1999 2001 2003 2005 2007 2009
2
The projected decline in medium-term investment is also
consistent with the current environment of weak profitability,
tightening credit conditions and continued turbulence in
Source: Statistics New Zealand, RBNZ estimates.
global markets (see chapter 4).
Consistent with ongoing pressure in the labour market
While the effects of the emissions trading scheme might
and increases in the minimum wage, productivity-adjusted
boost near-term investment in carbon-efficient technologies,
wage inflation is forecast to persist at rates above 3 percent
the high degree of uncertainty surrounding the details of
until late-2009. A number of government regulations,
the scheme skews the risks around future investment to the
including KiwiSaver, and statutory requirements for increased
downside (see box B, chapter 2).
annual leave, add to firms’ labour costs.
30
Reserve Bank of New Zealand: Monetary Policy Statement, March 2008
Government
Gross domestic product
Partly offsetting weakness in the household sector, fiscal
Economic growth has moderated over the past six months
policy is expected to provide stimulus to domestic activity
and recent developments suggest that softer growth is
over the projection horizon. Based on the December Half
likely to persist. The deterioration in the outlook for the
Yearly Economic and Fiscal Update (HYEFU), government
household sector suggests underlying domestic demand
spending is projected to outpace GNE growth over most of
is weak, and dry conditions are also hampering external
the projection horizon (figure 5.14). In addition, consistent
sector growth prospects. However, providing some support
with the revenue reduction allowance made in the HYEFU,
to domestic demand over the medium term, government
our projection assumes a $1.5 billion allowance for personal
spending is expected to continue to positively contribute to
tax cuts in April 2009. Despite the strength in government
growth. Near-term business investment also boosts activity
spending, the overall fiscal position remains well supported.
and the sizeable gains in the terms of trade over the past
The HYEFU showed a sizeable increase in tax revenue
18 months remain supportive of incomes. Indeed, gross
projections stemming from the positive income effect of the
domestic income is expected to soar over the coming year
elevated terms of trade. Accordingly, the government debt
(figure 5.15).
projection has improved dramatically.
Figure 5.15
Figure 5.14
Real gross domestic product and real gross
Government spending, gross national
domestic income
expenditure excluding government spending
(annual average percent change)
(annual average percent change, excluding
%
7
military spending)
%
15
%
15
Projection
10
Government spending
GNE ex-government
spending
10
Real gross
domestic income
6
5
5
4
4
3
3
Real gross
domestic product
1
0
0
-5
0
Gross national
expenditure
1995
1997
1999
6
5
2
5
Projection
%
7
-1
2
1
0
1995 1997 1999 2001 2003 2005 2007 2009
-1
Source: Statistics New Zealand, RBNZ estimates.
2001
2003
2005
2007
2009
-5
Source: Statistics New Zealand, RBNZ estimates.
Our growth projection over the medium term is subject
to considerable uncertainty. The outlook for the world
Recent public comments made by the Government
suggest some possibility for tax cuts in excess of those
incorporated in our forecasts. Any additional personal tax
cuts over and above those currently incorporated in our
projection would add further impetus to the growth and
inflation outlook. While the size of any additional fiscal
stimulus matters, the timing and composition are also
economy is now weaker, with potential negative implications
for export demand, and tighter credit constraints (see box C,
chapter 2). In addition, the effects of the emissions trading
scheme might be more detrimental to growth over the
medium term (see box B, chapter 2). Providing an offset
to these negative risks is the potential for more substantial
fiscal stimulus than currently incorporated.
very important. In particular, fiscal stimulus occurring once
inflation pressures have clearly eased is likely to be of less
concern to monetary policy.
Reserve Bank of New Zealand: Monetary Policy Statement, March 2008
31
Inflation
higher wage costs are passed on to final consumer prices to
Reflecting higher food and petrol prices, and underpinned
a greater degree than currently assumed. In addition, with
by the current stretched nature of the economy, annual CPI
annual CPI inflation projected to remain above 2.5 percent
inflation increased to 3.2 percent in the December quarter.
for a prolonged period, inflation expectations will remain
Throughout the projection, a range of cost pressures are
elevated. If high inflation expectations become even more
expected to contribute to inflation. Of note, food and petrol
entrenched, risks of further pressure on final consumer
price inflation is expected to persist over the coming year,
prices increase.
reflecting increases in international commodity prices. Rising
Further out in the projection, CPI inflation is expected to
wage and energy costs are also expected to continue putting
moderate as domestic demand cools and capacity constraints
pressure on firms’ margins.
through the economy alleviate (figure 5.16). Tradable price
Government administered charges add further to the
pressures are also expected to wane over the projection from
outlook for energy costs domestically, the most significant of
recent highs. However, the projected decline in the exchange
these being the inflationary effects of the emissions trading
rate will add to tradable price pressures, and tradable inflation
scheme. The most visible effects of the scheme will be to
is expected to remain above its recent historical average.
petrol and electricity prices, as emission charges are passed
Nonetheless, given reduced projected capacity constraints,
on to customers. The scheme is also likely to bring about
excluding the effects of the Government’s emissions trading
indirect price effects, particularly for the transport sector and
scheme, annual CPI inflation is slightly weaker from 2009
other energy intensive industries. Our projections assume
relative to the December projections.
these indirect price effects equate to about half of the direct
Figure 5.16
price effects. Based on an emissions unit price of $25 per
CPI, tradable and non-tradable inflation
tonne, the emissions trading scheme is assumed to increase
(annual)
annual CPI inflation by about 0.3 percentage points in 2009
%
6
due to higher petrol prices, and 0.4 percentage points in
2010 as electricity prices increase. These price effects include
both the assumed direct and indirect effects described above.
In response to these higher price pressures, consumers’
inflation expectations are also expected to increase to a
limited extent (see box B, chapter 2).
Underlying these cost pressures, the economy is
currently facing significant capacity constraints. As a result,
quarterly non-tradable inflation is expected to remain high
Projection
Non-tradable
4
%
6
4
CPI
2
2
0
0
-2
-2
Tradable
-4
1995 1997 1999 2001 2003 2005 2007 2009
Source: Statistics New Zealand, RBNZ estimates.
-4
in the near term. Indeed, current strength in wage inflation
poses an upside risk to domestic price pressures if these
32
Reserve Bank of New Zealand: Monetary Policy Statement, March 2008
Appendix A1
Summary tables
Table A
Projections of CPI inflation and monetary conditions
(CPI and GDP are percent changes)
2002
2003
2004
2005
2006
2007
2008
2009
2010
Mar
2008
1
CPI
Annual
TWI
90-day bank bill
rate
0.6
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
First half average
0.8
3.3
72.3
8.8
Second half average
0.8
3.5
71.6
8.8
First half average
0.6
2.9
71.4
8.7
Second half average
0.8
2.7
71.0
8.5
First half average
0.6
2.7
69.9
8.0
Second half average
0.7
2.6
68.5
7.4
CPI
CPI
GDP
GDP
Quarterly
Annual
Quarterly
Annual Average
Jun
1.0
2.0
0.8
2.1
Sep
0.5
1.8
0.5
2.7
Dec
1.2
3.2
0.7
3.0
Mar
0.7
3.4
0.3
3.0
Jun
1.0
3.3
Quarterly projections
2007
CPI
Quarterly
Notes for these tables follow on pages 36 and 37.
Reserve Bank of New Zealand: Monetary Policy Statement, March 2008
33
34
Reserve Bank of New Zealand: Monetary Policy Statement, March 2008
(1)
4.0
1.4
4.6
3.9
Business
2.3
7.8
3.0
4.0
Gross national expenditure
Exports of goods and services
Imports of goods and services
Percentage point contribution to the growth rate of GDP.
5.1
3.8
4.8
GDP (production)
GDP (production, March qtr to March qtr)
4.4
5.1
3.5
Expenditure on GDP
7.2
-0.1
4.9
0.1
3.8
(1)
Stockbuilding
5.0
3.9
Final domestic expenditure
7.8
6.8
14.5
7.1
16.7
Total
Non-market government sector
23.5
2.0
12.1
4.6
3.5
3.8
12.7
0.9
7.5
0.2
7.6
12.9
14.0
2.8
4.0
3.6
12.5
4.7
6.2
0.3
5.6
7.6
5.2
9.8
2.8
5.0
2.4
2.7
2.9
4.1
-0.1
4.3
-0.6
4.8
5.2
-2.3
9.5
-4.5
4.7
5.0
4.6
2006
2.4
1.6
2.4
-1.7
3.1
0.7
-0.9
1.7
-2.3
-8.6
-1.4
-2.7
3.0
4.4
2.6
2007
2.4
3.0
1.9
1.9
1.5
2.8
3.2
8.7
2.0
2.4
1.9
0.2
1.9
5.0
1.1
3.7
2.7
4.4
8.4
5.2
-8.5
-2.6
5.3
4.2
1.6
4.4
0.8
2009
3.5
4.8
3.1
2008
Residential
14.5
6.0
5.3
Actuals
2005
Market sector:
4.2
6.4
2004
3.1
Public authority
5.1
2003
Gross fixed capital formation
Total
2.8
2002
Private
Final consumption expenditure
March year
(annual average percent change, unless specified otherwise)
Table B
Composition of real GDP growth
1.7
1.9
1.9
2.0
3.3
1.5
-0.1
1.6
0.5
8.4
-0.8
2.1
2.0
3.3
1.6
Projections
2010
2.4
2.0
2.0
1.5
3.1
1.4
-0.2
1.6
1.4
6.5
0.1
4.2
1.7
3.3
1.2
2011
Reserve Bank of New Zealand: Monetary Policy Statement, March 2008
35
World economy
World GDP (annual average % change)
World CPI inflation
Key balances
Government operating balance (% of GDP, year to June)
Current account balance (% of GDP, year to March)
Terms of trade (OTI measure, annual average % change)
Household saving rate
(% of disposable income, year to March)
1.6
1.4
1.9
-3.1
4.2
-3.8
3.5
5.2
1.6
3.8
Output
GDP (production, annual average % change)
Labour market
Total employment
Unemployment rate (March qtr, seasonally adjusted)
Trend labour productivity
5.4
50.3
Monetary conditions
90-day rate (year average)
TWI (year average)
3.4
0.2
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)
Potential output (annual average % change)
Output gap (% of potential GDP, year average)
2002
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
1.3
3.7
1.5
5.1
5.9
56.4
2.5
2.2
-11.1
-15.5
2003
3.3
1.5
5.3
-4.8
3.9
-9.1
3.1
4.1
1.1
3.6
1.4
3.5
5.3
63.6
1.5
2.1
-10.5
-5.1
2004
3.7
2.1
4.2
-6.9
5.8
-10.4
3.4
3.8
1.1
3.2
2.2
3.8
6.5
67.1
2.8
2.5
0.5
4.9
2005
Actuals
3.6
2.5
7.3
-9.3
-0.8
-15.1
2.6
3.9
1.0
2.9
2.0
2.7
7.3
70.1
3.3
3.0
6.9
3.6
2006
3.6
2.0
4.8
-8.2
1.9
-14.6
1.7
3.7
1.2
2.8
0.7
1.6
7.6
65.6
2.5
3.0
0.3
4.8
2007
2.9
0.9
1.6
3.4
1.4
4.0
-7.7
7.6
-12.1
3.8
2.8
3.4
3.6
3.2
11.6
8.6
71.7
3.0
2008
2.9
-0.1
0.9
3.7
1.6
2.7
-8.1
2.1
-9.3
3.1
2.0
3.0
3.5
0.0
-3.1
8.8
71.7
1.9
2009
2.9
-1.1
-0.3
4.4
1.8
2.4
-8.0
-2.4
-7.1
3.6
2.0
2.7
2.9
1.6
0.9
8.5
70.9
1.9
2010
Projections
2.8
-1.9
0.0
5.1
2.0
3.0
-7.3
-1.6
-6.7
3.7
1.9
2.6
2.4
5.6
3.1
7.4
68.4
2.0
2011
Notes to the tables
CPI
Consumers 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 Accounts.
36
Reserve Bank of New Zealand: Monetary Policy Statement, March 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, March 2008
37
Appendix B
Companies and organisations contacted by RBNZ staff
during the projection round
Balance Agri-Nutrients Ltd
NZ Council of Trade Unions
Barfoot & Thompson Ltd
NZ Oil & Gas Ltd
BP Oil NZ Ltd
Paymark Ltd
Contact Energy Ltd
Ports of Auckland Ltd
Debtworks (NZ) Ltd
Postie Plus Group Ltd
Employers and Manufacturers Association
Quinovic Property Management – New Zealand
Fonterra Co-operative Group Ltd
Restaurant Brands New Zealand Ltd
Foodstuffs South Island Ltd
Retailers and Merchants Association
H & J Smith Holdings Ltd
Salt Recruitment Ltd
Landcorp Farming Ltd
Skyline Gondola, Restaurant and Luge
Lone Star Ltd
Smith & Caughey’s Ltd
Mainfreight Ltd
Tait Electronics Ltd
Mainzeal Property and Construction Ltd
Taylor Preston Ltd
Ministry of Tourism
Vodafone New Zealand Ltd
Motor Trade Finances Ltd
Wellington Combined Taxis
Nelson Pine Industries Ltd
Yarrows “The Bakers” Ltd
Nissan New Zealand Ltd
38
Reserve Bank of New Zealand: Monetary Policy Statement, March 2008
Appendix C
Reserve Bank statements on monetary policy
OCR unchanged at 8.25 percent
strong, especially from dairy, and core inflationary pressures
6 December 2007
persist.
The Official Cash Rate (OCR) will remain unchanged at 8.25
percent.
“Since the December Monetary Policy Statement there
has been ongoing turbulence in international financial
Reserve Bank Governor Alan Bollard said: “Economic
markets and a deterioration in the outlook for the United
activity has occurred largely as outlined in the September
States and European economies. We will be watching these
Monetary Policy Statement. Capacity pressures – particularly
developments closely, particularly their implications for the
in the labour market – remain significant, while the housing
Asian and Australian economies and for world commodity
market has clearly slowed. A substantial income boost is still
prices.
expected to occur through 2008, as recent dairy price gains
reach farmers.
“Despite this, the New Zealand economy is projected to
keep growing reasonably well. Ongoing inflationary pressures
“Nevertheless, the outlook has changed somewhat
are underpinned by an expansionary fiscal policy, and rising
due to recent developments. Oil prices, which are nearly 30
food and energy prices, which will be under further pressure
percent higher than we assumed in September, and rapidly
with the Emissions Trading Scheme in a year’s time.
rising global food prices are likely to result in headline inflation
“On balance, the outlook for interest rates is little
above 3 percent for much of next year. In the medium term,
changed from the December Monetary Policy Statement,
despite ongoing fiscal surpluses, the likelihood of future
but the level of uncertainty has increased. Although CPI
personal tax cuts adds to the inflation outlook.
inflation is expected to remain above 3 percent during
“There are considerable risks around our view. The price
2008, we believe that the current level of the OCR remains
effects of the Government’s proposed emissions trading
consistent with future inflation outcomes of 1 to 3 percent
scheme add upside risk to inflation. Global financial markets
on average over the medium term.”
remain unusually turbulent, posing significant downside risk
for some of our key trading partner economies.
“Overall, inflationary pressures have increased, and
interest rates are now likely to remain around current levels for
longer than previously thought. We believe that the current
level of the OCR remains consistent with future inflation
outcomes of 1 to 3 percent on average over the medium
term, based on the information to hand at present.”
OCR unchanged at 8.25 percent
24 January 2008
The Official Cash Rate (OCR) will remain unchanged at 8.25
percent.
Reserve Bank Governor Alan Bollard said: “The outlook
for the New Zealand economy remains broadly consistent
with the view outlined in the December Monetary Policy
Statement. While the housing market continues to cool, the
labour market remains tight, domestic income growth is still
Reserve Bank of New Zealand: Monetary Policy Statement, March 2008
39
Appendix D
The Official Cash Rate chronology
Date OCR
(percent)
Date OCR
(percent)
17 March 1999
4.50
23 October 2003 21 April 1999 4.50
4 December 2003
5.00
19 May 1999 4.50
29 January 2004
5.25
30 June 1999 4.50
11 March 2004
5.25
18 August 1999 4.50
29 April 2004
5.50
29 September 1999 4.50
10 June 2004
5.75
17 November 1999 5.00
29 July 2004
6.00
19 January 2000 5.25
9 September 2004
6.25
15 March 2000 5.75
28 October 2004
6.50
19 April 2000 6.00
9 December 2004
6.50
17 May 2000 6.50
27 January 2005
6.50
5 July 2000
6.50
10 March 2005
6.75
16 August 2000
6.50
28 April 2005
6.75
4 October 2000 6.50
9 June 2005
6.75
6 December 2000
6.50
28 July 2005
6.75
24 January 2001 6.50
15 September 2005
6.75
14 March 2001 6.25
27 October 2005
7.00
19 April 2001
6.00
8 December 2005
7.25
16 May 2001 5.75
26 January 2006
7.25
4 July 2001
5.75
9 March 2006
7.25
15 August 2001 5.75
27 April 2006
7.25
19 September 2001 5.25
8 June 2006
7.25
3 October 2001 5.25
27 July 2006
7.25
14 November 2001 4.75
14 September 2006
7.25
23 January 2002 4.75
26 October 2006
7.25
20 March 2002
5.00
7 December 2006
7.25
17 April 2002
5.25
25 January 2007
7.25
15 May 2002
5.50
8 March 2007
7.50
3 July 2002
5.75
26 April 2007
7.75
14 August 2002
5.75
7 June 2007
8.00
2 October 2002
5.75
26 July 2007
8.25
20 November 2002
5.75
13 September 2007
8.25
23 January 2003
5.75
25 October 2007
8.25
6 March 2003 5.75
6 December 2007
8.25
24 April 2003 5.50
24 January 2008
8.25
5 June 2003 5.25
24 July 2003 5.00
4 September 2003 5.00
40
5.00
Reserve Bank of New Zealand: Monetary Policy Statement, March 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:
24 April 2008
OCR announcement
5 June 2008
Monetary Policy Statement
24 July 2008
OCR announcement
11 September 2008
Monetary Policy Statement
23 October 2008
OCR announcement
4 December 2008
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, March 2008
41
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.
42
Reserve Bank of New Zealand: Monetary Policy Statement, March 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, March 2008
43