Download Monetary Policy Statement March 2009 Contents

Monetary Policy Statement
March 20091
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. International developments and outlook
7
4.
Recent developments in the domestic economy
16
5.
The macroeconomic outlook
25
A.
Summary tables
34
B.
Companies and organisations contacted by RBNZ staff during the projection round
39
C.
Reserve Bank statements on monetary policy
40
D.
The Official Cash Rate chronology
42
E.
Upcoming Reserve Bank Monetary Policy Statements and Official Cash Rate release dates
43
F.
Policy Targets Agreement
44
Appendices
This document is also available on www.rbnz.govt.nz
ISSN 1770-4829
1
Projections finalised on 26 February 2009. Policy assessment finalised on 11 March 2009.
Reserve Bank of New Zealand: Monetary Policy Statement, March 2009
1
1
Policy assessment
The Reserve Bank today reduced the Official Cash Rate (OCR) by 50 basis points to 3 percent.
The world economy deteriorated very rapidly late last year, amid ongoing losses and extreme volatility in international
financial markets. While monetary and fiscal policy responses in many countries have been substantial we still expect the
adverse economic forces generated by the crisis to remain dominant throughout 2009. The timing and extent of global
recovery remain highly uncertain.
In New Zealand, the impact of difficult trading conditions is showing through clearly in reduced export revenues, weak
business sentiment, and sharply curtailed investment and employment. Further house price falls and increased precautionary
saving by households are driving a weakness in spending. Inflation pressure is abating rapidly as a result.
The OCR has now been reduced 525 basis points in little more than six months, taking interest rates to very stimulatory
levels. Further falls in the lending rates faced by households and businesses are in the pipeline. While credit growth is
easing in line with the weak economy, we expect financial institutions to continue lending on sound business propositions,
to support the recovery.
In addition to the substantial change in monetary policy settings, there has been a large amount of stimulus from fiscal
policy. These policy changes, together with the sizeable exchange rate depreciation, will act to support the New Zealand
economy: therefore, we expect to see activity troughing in the middle of this year and then gradually picking up thereafter.
However, the scale of the global financial crisis is such that there is great uncertainty about future economic developments
and there is a risk that the recovery may occur later and be more protracted than we anticipate.
As economic activity troughs, we expect the rapid easing of monetary policy to slow. Any future cuts will be much
smaller than observed recently. We do not expect to see in New Zealand the near-zero policy rates of some countries. New
Zealand needs to retain competitiveness in the international capital markets. We will assess the need for further cuts in the
OCR against emerging developments in the global and domestic economies and the responses to policy changes already in
place.
Alan Bollard
Governor
2
ReseRve Bank of new Zealand: Monetary Policy Statement, March 2009
2
Overview and key policy judgements
The combined effects of New Zealand’s weakening domestic
falling demand, has prompted many New Zealand firms to
housing market and the global financial and economic
consider additional cost-cutting measures, including paring
crisis are weighing heavily on the New Zealand economy.
back investment plans and reducing labour demand. While
We estimate that the New Zealand economy is in its most
the only evidence of this in official data thus far has been
prolonged recession since the 1970s. In response, domestic
a significant reduction in hours worked, we expect to see
inflation pressures appear to be abating rapidly, and many of
sizeable reductions in employment and investment over the
the macroeconomic imbalances that had built up earlier this
coming year.
decade are starting to unwind. The speed with which the
The worsening employment outlook is weighing on
outlook has changed has prompted the Bank to reduce the
consumer confidence, encouraging households to cut back
Official Cash Rate (OCR) significantly over recent months.
spending, repay debt, and increase precautionary saving.
While we expect to see further weak data over the coming
This has occurred at a time when households were already
months, we project the stimulus provided by markedly lower
scaling back spending in response to falling housing and
interest rates, the lower New Zealand dollar, and significant
financial wealth. This is happening despite personal tax cuts,
fiscal stimulus, will support a recovery in activity later this
substantial interest rate reductions and lower petrol prices.
year.
As a result of these developments, we now project the
While it has been clear for some time that the global
New Zealand economy to continue contracting through
financial crisis and the slowing US economy would have a
the first half of this year, before recovering thereafter from
very negative impact on the global economy, data received
a low base. Compared with the December Statement,
over the past three months have shown that these effects
we now project a deeper and more prolonged recession
are proving to be much larger than we and others had
(figure 2.1 overleaf). The subsequent recovery is projected
expected. The effects have been particularly marked in our
to be assisted by a number of factors. Initially, the recovery
main Asian trading-partner economies, with many recording
reflects a view that most components of GDP will stop
large declines in activity over the December quarter.
falling during the second half of this year, while government
A clear negative impact is being seen through the
spending continues to grow. More critically, the projected
traditional trade channel by way of larger-than-expected
trend recovery is predicated on the assumption that the
declines in international commodity prices and reduced
extraordinary steps taken overseas to shore up international
demand for many of New Zealand’s manufactured exports.
financial markets and the global economy will be successful
We also expect exports of services to fall by more than
and help return our trading-partner economies to modest
projected previously as international visitors delay or cancel
positive growth early next year.
their New Zealand holidays. As was the case at the time of
Domestically, the recovery will be assisted by strong
the December Statement, the international financial crisis
growth in government spending, enacted and upcoming
has also made it more difficult for banks to secure offshore
personal tax cuts, recent significant exchange rate
funding, forcing them to pay higher margins over expected
depreciation, and the very large interest rate reductions over
policy rates than has been the case for many years. This
the past six months. Our projection also assumes that credit
is highlighting the role that developments in the financial
conditions start to improve later this year.
sector can have in amplifying macroeconomic downturns.
Overall, our projection reflects a structural rebalancing of
While the OCR reductions in New Zealand over recent
the economy, away from the debt-fuelled domestic spending
months have resulted in significantly lower residential
boom of recent years towards more export-orientated
and business lending rates, the tighter credit conditions
growth. This is expected to significantly improve the current
internationally have provided some offset. Furthermore,
account balance from early next year. However, the very
many New Zealand lenders are looking to increase
weak global economy, and the resultant falling demand for
margins and tighten lending conditions after several years
our exports, is slowing this adjustment significantly.
of easier-than-normal conditions. This, combined with
Reserve Bank of New Zealand: Monetary Policy Statement, March 2009
3
Figure 2.1
Gross domestic product
(annual average percent change)
%
8
Projection
%
8
6
6
4
4
2
2
Dec
MPS
0
-2
Central
-4
1970
1975
1980
1985
1990
1995
2000
2005
2010
0
-2
-4
Source: Statistics New Zealand, RBNZ estimates, Hall and McDermott (see chapter 5 for full reference).
After an extended period of annual inflation in or above
December Statement is the fact that our projection no longer
the top half of the inflation band, the negative shocks now
incorporates the effects of the Emissions Trading Scheme.
striking the New Zealand economy are expected to cause
This decision reflects the Government’s establishment of the
weaker inflation pressures over the projection period, and will
Emissions Trading Scheme Review Committee to review the
leave inflation settling around the mid-point of the inflation
scheme and related matters.
band. Slowing activity last year – itself partly reflecting
The decline in inflation pressures since the December
earlier OCR increases – and falling commodity prices have
Statement has also been apparent in other variables, with
already caused annual CPI inflation to fall sharply from its
wage inflation and surveyed inflation expectations all moving
September 2008 peak of 5.1 percent. Combined with lower
lower in recent months. While we expect these to continue
inflation expectations, these factors are expected to push
to trend lower over the coming quarters in response to
annual headline CPI inflation temporarily below 1 percent in
weak domestic demand, we see little risk of medium-term
the September quarter this year, before it returns to around
inflation holding below the 1 to 3 percent inflation band.
2 percent for the remainder of the projection (figure 2.2).
While most of the projected bounce-back in annual inflation
Contributing to the lower CPI projection relative to the
reflects earlier petrol price declines dropping out of the
Figure 2.2
annual calculation, we project that demand growth and the
CPI inflation
falling exchange rate will put some limited upward pressure
(annual)
on inflation.
%
6
%
6
Projection
The significant deterioration in the outlook for activity
here and abroad, and the subsequent decline in the outlook
5
5
for inflation, have prompted the Bank to reduce the OCR
4
4
considerably over recent months (box A). This is reflected
3
Dec
MPS
2
1
0
2
Central
2000
2002
2004
2006
2008
2010
Source: Statistics New Zealand, RBNZ estimates.
4
3
in a sizeable reduction in our 90-day interest rate projection
relative to that projected in December, now troughing at
around 3 percent (figure 2.3).
1
0
ReseRve Bank of new Zealand: Monetary Policy Statement, March 2009
Box A
Figure A1
Recent monetary policy decisions
Official Cash Rate
In the 12 months to the July 2008 OCR review, the Official
%
10
%
10
Cash Rate (OCR) was held at 8.25 percent. In addition to
what was an already cyclically high cash rate, tight global
8
8
6
6
4
4
credit conditions pushed domestic lending rates higher
relative to the OCR. While helping constrain the intense
domestic inflation pressures that were apparent at the time,
we believe this period of tight policy also helped limit the
extent to which householders borrowed excessively.
More recently, significant deterioration in the economic
outlook both domestically and abroad, along with continued
2
1999
2001
2003
2005
2007
2009
2
Source: RBNZ.
credit pressures, prompted the Bank to reduce the OCR
markedly. Indeed, following the 1.5 percent reductions at
and re-introducing Reserve Bank bills) and expanding
both the December 2008 Statement and the January 2009
the range of securities acceptable in domestic markets
OCR review, the OCR had been reduced by a cumulative
operations (such as AAA-rated residential mortgage
4.75 percent in just six months to a historical low of 3.5
backed securities).
The reduction in the OCR since July has been larger and
percent in January 2009 (figure A1).
In addition, throughout this period the Bank has
more rapid than that seen during any other easing cycle.
continued to enhance its liquidity facilities, helping to
While it is clear that significant interest rate reductions
transmit the lower OCR to the interest rates faced by New
have been appropriate, it will be some time before it is
Zealand households and businesses. This has included
known whether the easing to date has been of a suitable
introducing new facilities (including a Term Auction Facility
magnitude.
Figure 2.3
couple of years. The lagged response of the latter is primarily
90-day interest rate
due to the preponderance of fixed-rate mortgages in New
%
10
Projection
%
10
Zealand. Although the interest rate reductions have been
9
9
very large, it will be some months before they affect activity
8
8
noticeably.
7
7
Dec
MPS
6
5
5
Central
4
3
2
6
4
3
2000
2002
Source: RBNZ.
2004
2006
2008
2010
2
Monetary policy judgements
The uncertainty surrounding our central projection is
extremely large, with the risks skewed to the downside.
Most indicators, both in New Zealand and abroad, suggest
that activity will continue to deteriorate over coming
months, with very few showing any sign of stabilising.
The reductions in the OCR over recent months have
The speed with which these indicators have fallen, and the
resulted in significant declines in the interest rates faced
potential for nasty feedback into the financial sector, mean
by new borrowers and those re-pricing existing debt. This
that the trough in activity this year could be much deeper
has already started to be reflected in the effective mortgage
and the subsequent recovery much later and more muted
rate – the average rate across all outstanding mortgages –
than we are currently projecting. Conversely, the extent of
with further significant falls expected to occur over the next
ReseRve Bank of new Zealand: Monetary Policy Statement, March 2009
5
various conventional and unconventional policies that have
addition, New Zealand does not appear to have the excess-
been adopted internationally to shore up the international
housing supply that is apparent in the United States.
financial system and to support the global economy has been
Also, the Reserve Bank and other New Zealand decision-
unprecedented. There is a risk they could be more effective
makers have responded to international developments
than expected, leading to a much faster and sharper recovery
before their full effects have been felt here. While most of
in trading-partner activity than we project.
the reductions in the OCR over the past six months or so
In terms of specific international risks, we see the outlook
have been in response to weakening activity and easing
for the US housing market as critical to the performance
inflation pressures being observed in New Zealand, some of
of the global economy. If the US housing market fails to
the easing was also in anticipation of the future negative
stabilise in the coming months, this could reinforce a further
effects of the global economy on New Zealand. Furthermore,
downward spiral in the financial sector and the US economy.
the magnitude of official interest rate reductions has been
Recent experience has highlighted the critical role of the
larger in New Zealand than observed elsewhere, and the
US consumer in international demand, despite internal
resultant declines in mortgage and corporate rates have also
demand growth in many developing economies. Also, the
been much larger than have occurred in the United States
performance of the UK housing market will be quite pivotal,
and United Kingdom. These factors are the main reasons
in that it will affect the performance of the UK banking
why we are projecting New Zealand, and even more so
sector.
Australia, to perform better through this period than many
As a result of the poor international outlook, we project
of our trading partners.
a very challenging next year or so in New Zealand, with
Weighing against these positive factors, New Zealand’s
activity projected to continue contracting through until
large external liability and the resultant dependence on
the middle of this year and employment falling into next
international financing will remain a clear vulnerability for
year. With the risks to global activity being skewed to the
some time. We project the annual current account deficit
downside, the risks to New Zealand activity, employment,
to remain around 8 percent of GDP through 2009, before
and therefore medium-term inflation, are also skewed to the
narrowing steadily from early 2010. Underlying the current
downside.
account projection is a trend narrowing in the investment
In a number of respects, New Zealand is better
income deficit, which is expected to steadily improve over
positioned than many of our northern hemisphere trading
the next few quarters, reflecting lower interest payments
partners. A lot of this relates to the better capital position
and lower profits accruing to foreign investors. Over the
of the New Zealand banks, which have not experienced the
next few quarters this is projected to be offset by a small
same asset losses as their counterparts in the United States,
deterioration in the goods and services balance before it
United Kingdom, and the euro area. Furthermore, while the
improves further out.
prices of our commodity exports have fallen very sharply
The relatively modest nature of the improvement in
over recent months, there is little evidence in monthly data
the goods and services balance reflects the fact that the
that demand for New Zealand’s manufactured and services
weak global economy is weighing heavily on export prices
exports has fallen to the extent observed in many other
and volumes. Also, recent and projected exchange rate
economies. The benefits of the floating New Zealand dollar
depreciation is expected to push down the services terms
have also been highlighted, with its 30 percent depreciation
of trade as it pushes up the New Zealand-dollar cost of
over the past year providing a significant offset to the
travelling abroad. However, the trade balance is projected
weaker global economy. The lower exchange rate is likely to
to start improving early next year as the lower exchange
also support domestic production over the medium term as
rate stimulates exports of services while imports remain
New Zealanders switch towards domestic goods and services
weak. From a sectoral point of view, a significant reduction
in the face of higher New Zealand dollar import prices. In
in household dissaving is projected to offset increased
government deficits.
6
Reserve Bank of New Zealand: Monetary Policy Statement, March 2009
3
International developments and outlook
Developments in the international economy have contributed
financial stresses in recent months have become increasingly
to a significant deterioration in the outlook for growth and
widespread, with events in the developed world now clearly
inflation in New Zealand.
having a negative impact on emerging markets. Capital
The past year has seen an extremely sharp and highly
flows to emerging markets have fallen considerably and
synchronised deterioration in economic activity in our
investors are repatriating funds back into developed safe-
trading-partner economies. Weakness in activity was
haven economies, further amplifying the downturn in
particularly pronounced in the final quarter of the year.
emerging markets. The scope for improvement in financial
This was primarily because of the significant deterioration
conditions is tenuous, and stresses in financial markets
in financial conditions that occurred over the past year, as
are now expected to continue for longer than previously
well as the associated declines in business and consumer
anticipated.
Financial stresses have been clearly reflected in global
confidence. As a result, many economies have now been
pushed into recession.
equity markets (figure 3.1). Uncertainty surrounding the
Financial conditions are expected to remain challenging
conditions in the US and European banking sectors and
for an extended period, and adjustments in household and
concern over the effectiveness of various government
financial institution balance sheets are likely to continue for
stimulus packages have seen risk aversion remain high. The
some time. Consequently, we expect a protracted period of
decline in investor confidence has caused equity prices to
weakness in our trading-partner economies. In 2009, growth
continue to fall since the start of last year, with stock markets
in the global economy is expected to fall to its slowest pace
recently breaking through November lows. Over the past 18
in several decades, with only a very gradual recovery. This is
months, the value of world stock markets has approximately
despite the introduction of significant monetary and fiscal
halved according to Bloomberg estimates, falling to about
stimulus. As discussed in chapter 5, this weakness in global
US$30 trillion.
activity is expected to have a large and persistent dampening
effect on activity in New Zealand.
Figure 3.1
Equity indices
(1 January 2007 = 100)
International financial market
developments
Equity index
130
120
100
been major contributors to weakness in global activity.
90
These conditions originated from the deterioration of the
US housing market and housing-related financial assets that
began in 2006. This resulted in significant financial stress
from mid-2007 (including large declines in financial wealth
and tight credit conditions), which was quickly transmitted
to other regions.
Developments in financial markets have already
ASX 200
110
Challenging financial conditions and high risk aversion have
VIX index
Dec MPS 90
80
DAX 30
70
60
50
S&P 500
80
40
FTSE 100
70
NZX 50
30
20
60
50
VIX Index (RHS)
10
0
40
Jan 07
Jul 07
Jan 08
Jul 08
Jan 09
Source: Bloomberg, RBNZ.
Note: Updated to 3 March 2009. The VIX index measures
the implied volatility of options on the S&P500 index –
commonly used as a proxy for risk aversion.
resulted in significant declines in household and business
sector activity globally. And with both economic activity
and earnings data continuing to surprise on the downside,
the negative feedback loop between financial markets
and the real economy has strengthened markedly. Further,
The cost and availability of credit remains an issue
in wholesale credit markets. Although various lending
programmes put in place by the US Federal Reserve and other
central banks have helped reduce short-term money market
pressure, the spread between 3-month inter-bank lending
ReseRve Bank of new Zealand: Monetary Policy Statement, March 2009
7
rates (Libor and bank bills) and policy rate expectations
Financial institutions have continued to experience
remains relatively high by historical standards (figure 3.2).
significant write-downs, particularly in the United States.
Figure 3.2
The International Monetary Fund (IMF) estimates that credit
Spreads between three-month Libor and OIS
write-downs globally will total US$2.2 trillion before the
rates
crisis is over. Firms have raised a significant amount of capital
Basis points
400
Basis points
400
Dec MPS
350
350
United States
over this period, but the amount of capital raised so far falls
about US$150 billion short of total write-downs, with a large
portion of funds injected via government bailout programs.
300
300
250
250
Figure 3.4
200
200
Cumulative credit write-downs and capital raised
150
150
100
50
United Kingdom
Euro area
New Zealand
100
US$ billion
1200
Losses, Asia
50
1000
Losses, Europe
Australia
Jul 08
0
0
Jan 07
Jul 07
Jan 08
Jan 09
Source: Bloomberg, RBNZ estimates.
Note: Updated to 3 March 2009. Bank bill rates are used
instead of Libor rates in the case of New Zealand and
Australia.
Longer-term funding also remains costly and difficult to
obtain (although the widespread presence of government
guarantees has assisted issuance of debt in recent months).
Ongoing concern around financial stability has also seen
US$ billion
1200
1000
Losses, Americas
800
800
Total new capital raised
600
600
400
400
200
200
0
0
07Q2
07Q3
07Q4
08Q1
08Q2
08Q3
08Q4
Source: Bloomberg.
Note: Updated to 27 February 2009.
09Q1
(to date)
the cost of insuring against default for corporate borrowers
remain high (figure 3.3). This has meant credit conditions
remain tight for term funding, in turn encouraging banks to
tighten lending conditions for their own customers.
Foreign exchange markets
The uncertain outlook for financial markets and continued
volatility has meant that risk aversion has remained high.
Figure 3.3
Consequently, investors have continued to scale back their
Credit default swap spread indices
Basis points
450
positions in the New Zealand dollar and move into perceived
safe-haven currencies, such as the US dollar and Japanese
400
Basis points
450
Dec MPS
400
350
350
economy have made this safe-haven currency less popular).
300
300
The New Zealand dollar has also depreciated against most
250
250
200
200
United States
150
150
100
50
0
Jan 07
Jul 07
Jan 08
Source: Bloomberg, Reuters.
Note: Updated to 3 March 2009.
8
100
Australasia
Europe
Jul 08
Jan 09
yen (although more recently concerns about the Japanese
other major currencies since the December Statement, and
is now below its long-term average against most of its major
trading partners (figure 3.5). Issuance of New Zealand dollar
50
denominated securities has continued to fall. In particular, a
0
fall in New Zealand dollar Eurokiwi issuance has driven the
fall in offshore issuance, and sizeable maturities are coming
due in the next few years (figure 3.6).
ReseRve Bank of new Zealand: Monetary Policy Statement, March 2009
Figure 3.5
•
increasing availability of term lending facilities;
Deviation from New Zealand dollar long-term
•
widening the range of eligible collateral for lending
average
facilities and reducing credit restrictions;
%
40
20
%
40
NZD/JPY
•
purchasing commercial paper directly from firms; and
•
establishing temporary currency swap lines between
central banks.
20
NZD/AUD
Figure 3.7
0
0
Financial market expectations of international
policy rates
-20
-20
NZD/EUR
-40
1987
1991
1995
1999
Source: Bloomberg, RBNZ.
Note: Updated to 3 March 2009.
NZD/USD
2003
%
8
%
Expectation 8
-40
2007
Australia
6
6
United Kingdom
4
Figure 3.6
Total issuance of New Zealand dollar
Euro area
2
denominated Uridashi and Eurokiwi bonds
$billion
5
$billion
60
Outstanding
(RHS)
4
3
2
1
50
Issues
0
-1
-3
-4
United States
2
Japan
0
2006
2007
2008
Source: Reuters, Bloomberg, RBNZ estimates.
Note: Updated to 3 March 2009.
2009
0
40
In addition to the substantial easings in monetary policy
30
settings, existing fiscal stimulus plans have been accelerated,
20
-2
4
and new packages introduced. Discretionary fiscal policy
packages have included a wide range of measures, including
10
Maturities
-5
1996
2000
2004
2008
2012
Source: Bloomberg, Reuters, RBNZ.
Note: Data calculated until the end of February.
2016
0
tax cuts, targeted payments to households and increased
infrastructure spending. The United States in particular
has emphasised the use of fiscal stimulus to stabilise the
economy, as conventional monetary policy through the use
of short-term official interest rates has reached its limits.
Policy responses
Particularly large fiscal packages have also been introduced
in Australia, China and Singapore.
Sustained difficulties in financial markets and their effects on
real activity have prompted a significant response by policymakers. Since early December, central banks have continued
to reduce policy interest rates (figure 3.7). Additionally,
The IMF estimates that the aggregate fiscal stimulus in
the G20 countries in 2009, based on packages announced
to late January, will amount to around 11/2 percent of
aggregate GDP.1 While this stimulus is sizeable, it is still
markets are pricing in further easing in official interest
rates (where possible) and there are expectations that many
1
central banks will introduce further measures to try to
stimulate their respective economies. So far, central banks
have used a number of tools, as well as the standard interest
rate channel, to try and achieve monetary policy objectives.
A sample of measures taken so far includes:
ReseRve Bank of new Zealand: Monetary Policy Statement, March 2009
The material in this section and box B draws heavily from
three recent IMF documents: (2009) “Group of Twenty
– note by the staff of the IMF”, note for meeting of the
Deputies, 31 January to 1 February; (2009) “The state of
public finances: outlook and medium-term policies after
the 2008 crisis”, paper for meeting of the Board February
2009; and (2009) “Companion paper – the state of public
finances – outlook and medium-term policies after the
2008 crisis”, paper for meeting of the Board, February
2009.
9
Box B
United Kingdom positions are particularly worrying. This is
Fiscal stimulus and sustainability
because they both have large structural external financing
needs and impaired financial systems, and will need to
issues
raise their primary balances by very large amounts
Governments worldwide are taking significant steps to
lift national expenditure. With official interest rates in the
major advanced countries already at or close to zero, fiscal
stimulus and direct government support of the financial
system are now the primary focus for stabilisation policy.
Both of these approaches are limited by government budget
constraints and risks to perceived fiscal sustainability.
The government support of financial institutions,
through capital injections and purchases of impaired or
illiquid assets, has so far had a direct impact on gross public
debt of the G20 countries of about the same magnitude as
the discretionary fiscal stimulus that has been introduced
in response to the crisis. The overall impact of the crisis on
the public debt position for the G20 in aggregate is likely
to be well in excess of 10 percent of GDP (this is after
taking into account official financial sector support, the
operation of automatic fiscal stabilisers and discretionary
fiscal stimulus measures). This increase in G20 public debt
will be the largest sharp change in several decades. For
advanced G20 countries, the aggregate public debt ratio
is likely to approach 100 percent of GDP by 2010. Making
matters worse, the increase in fiscal costs associated with
increasing pension liabilities in advanced countries is a
known source of fiscal pressure over coming decades.
In many advanced countries, primary fiscal balances
will need to be lifted by several percent of GDP for many
years to bring gross debt ratios back down to more
Against this background, New Zealand’s position has
some interesting features. The gross public debt ratio,
about 25 percent of GDP, might suggest that New Zealand
has headroom for further fiscal stimulus, at least relative
to other developed countries – even bearing in mind our
projections for an increase in the debt ratio. The mediumterm consolidation of fiscal flows needed to stabilise public
debt in New Zealand is considerably smaller than that
required in other developed countries (with the exception
of Australia), because of our much lower starting position
on gross and net public debt.
However, an obvious constraint on fiscal options that
is particularly acute for New Zealand is the country’s large
external private sector financing needs relative to other
developed countries. This is a risk for the government’s
financial position because the government might need to
issue debt if external financing of the economy becomes
harder to obtain. Reflecting this risk, Standard and Poor’s
recently placed New Zealand’s foreign currency credit
rating on negative outlook.
A key part of the challenge for most developed
countries, New Zealand included, over the next few years
will be balancing the opposing risks of further economic
deterioration on one hand, and a loss of confidence in
governments’ solvency on the other. The former would
suggest that additional fiscal stimulus is needed, while the
latter would point to fiscal restraint.
comfortable levels. In view of the other risks to perceptions
of fiscal sustainability noted above, the United States and
small compared to the expected losses of output relative to
There is much uncertainty about how effective policy
trend over coming years due to the recession. On current
stimulus will be. Policies boosting household disposable
projections, these losses will be about 5 to 10 percent of
income (such as tax cuts), rather than government spending
GDP for the United States, Japan, the euro area and the
on goods and services, are likely to have quite muted impacts
United Kingdom. The rest of Asia will face even worse
in the current environment as households save a substantial
losses. Against the background of recessionary conditions
amount of the proceeds (as seen with the one-off tax rebates
and financial-system impairment, fiscal policy measures are
in the United States in 2008), dampening the stimulus.
only expected to limit the downside for growth, rather than
contributing to any sharp rebound in activity.
10
ReseRve Bank of new Zealand: Monetary Policy Statement, March 2009
An additional concern is that the large fiscal packages
in many developed economies are likely to lead to a marked
some fiscal sustainability issues in the context of the public
debt positions in those countries.
deterioration in the respective governments’ financial
positions. This casts doubt on the sustainability of spending
packages and increases the likelihood of the need for a
substantial fiscal consolidation when the global economy
recovers. If increased government spending is not expected
to be enduring, or if the risks to fiscal sustainability are priced
heavily into sovereign risk premiums, then the overall impact
of the fiscal stimulus is likely to be lower. Box B looks at the
International activity
Continuing strains in financial markets have contributed to
high levels of uncertainty and sharp declines in confidence.
Combined, these conditions resulted in a very steep and
synchronised deterioration in trading-partner activity over
the last few months of 2008 (figure 3.8). The extent of
size of fiscal packages announced in major countries and
Figure 3.8
Trading-partner GDP and activity indicators
(annual percent change)
%
United States
6
%
6
%
6
%
6
Euro area
4
4
4
4
2
2
2
2
0
0
0
0
-2
-2
-4
-4
ISM - Manufacturing
Consumer confidence
GDP
-2
-4
1995
1997
%
6
1999
2001
2003
2005
2007
%
6
United Kingdom
4
4
2
2
0
0
PMI
Consumer confidence
GDP
-2
-4
-2
PMI
Consumer confidence
GDP
1995
1997
1999
%
6
2001
-2
2003
2005
2007
-4
%
6
Japan
4
4
2
2
0
0
-2
-2
-4
-4
-6
-6
Industrial production
Consumer confidence
GDP
-8
-8
-10
-10
-12
-4
-12
%
8
%
14
6
6
12
12
4
4
10
10
8
8
2
2
0
0
%
8
1995
1997
1999
2001
2003
Australia
2005
2007
1995
1997
1999
2001
2003
2005
2007
China
%
14
6
-2
PMI
Consumer confidence
GDP
-2
4
6
PMI
GDP
2
4
2
-4
0
-4
2000 2001 2002 2003 2004 2005 2006 2007 2008
1995 1997 1999 2001 2003 2005 2007
Source: DataStream, national sources, RBNZ estimates.
Note: Activity indicators have been scaled so that they can be compared to GDP growth in each country.
0
ReseRve Bank of new Zealand: Monetary Policy Statement, March 2009
11
weakness has been larger and more widespread than
Figure 3.9
expected at the time of the December Statement.
Trading-partner GDP
In Western economies, there has been a sharp
retrenchment in business sector activity. Consumption
(annual average percent change)
%
6
Projection
spending has also softened in response to continuing falls
in asset prices, rapidly worsening employment conditions
and the ongoing adjustment in household debt positions.
Additionally, the broad-based weakness in demand has seen
a marked and widespread deterioration in global trade,
which has contributed to a very sharp contraction in activity
in Asian economies.
Growth in our trading-partner economies is now expected
to fall to rates not seen in several decades (figure 3.9).
Recent indicators have shown that the weakness in activity
%
6
4
4
2
2
0
0
-2
-2
-4
1984
1988
1992
1996
2000
2004
2008
-4
Source: DataStream, RBNZ estimates.
Note: The GDP measure shown is an export-weighted average of
GDP growth in New Zealand’s 12 major trading partners.
in late 2008 has continued into the new year. Additionally,
challenging financial conditions are now expected to have
tightened further in the December quarter and the
a larger and more sustained dampening effect on activity,
economic outlook became significantly more uncertain.
with particular weakness in business investment. We expect
•
Household spending in these economies has also
further large declines in trading-partner activity in the first
continued to weaken amid tighter credit conditions,
half of 2009 as business inventories continue to adjust to
softer labour markets (especially in the United States and
weaker demand, employment continues to fall, and financial
United Kingdom) and very weak consumer confidence.
conditions remain fragile. While activity is expected to remain
Households are also facing ongoing falls in housing and
soft in the second half of this year, we expect expansionary
financial asset prices.
monetary and fiscal policy, as well as government support
•
Since late 2008, monetary conditions in these economies
of financial institutions and markets, will limit the weakness
have been eased significantly, and large fiscal packages
in activity. Further ahead, growth in our trading-partner
have been announced. We expect these measures to
economies is likely to recover only gradually. This is because
begin supporting demand in the second half of 2009.
the strength in activity in recent years has been strongly
However, consumption and activity more generally are
related to growth in asset values and increased debt. Over
expected to return to trend rates of growth only very
the coming years, households and financial institutions
gradually, as households and financial institutions rebuild
are expected to gradually adjust their debt positions. This
their balance sheets and confidence slowly recovers.
adjustment will last for some time and will have a sustained
The principal exposure of New Zealand’s main Asian
trading partners to these developments has been through
dampening effect on global activity.
Major Western economies – the United States, the
reduced international trade, with recent months seeing very
United Kingdom and the euro area – had already contracted
large declines in industrial production and exports in the
in the September quarter. The pace of contraction of these
Asia region (figure 3.10). However, declines have also been
economies accelerated sharply in the December quarter.
seen in household spending, and direct financial strains are
Activity is expected to decline significantly further in early
more evident.
2009, and to recover only gradually in the second half of
•
In China, exports and industrial activity slowed sharply in
the year.
the December quarter (though not to the same extent
•
Particularly large declines have been seen in business
as in other economies in the region). We expect growth
investment and manufacturing, as credit conditions
in China to pick up later this year as a result of very
12
ReseRve Bank of new Zealand: Monetary Policy Statement, March 2009
•
significant monetary and fiscal policy stimulus, but to
with the relative health of the Australian financial sector. The
lower rates than in recent years due to the ongoing drag
outlook for the Australian housing market is also better than
from the export sector.
elsewhere, given relatively favourable financial conditions
Outside China, the deterioration in the global trade
and pent-up demand for housing after years of subdued
environment has led to very large declines in GDP,
construction and strong population growth.
particularly in Japan, Singapore, South Korea and Taiwan.
Growth in these economies is likely to remain soft for
some time, only recovering after other regions do. We
expect a particularly prolonged downturn in Japan,
Figure 3.11
Trading-partner GDP by region
(annual average percent change)
%
where there is relatively little scope for policy support
12
and where consumption and investment spending are
10
Projection
10
AxJ
8
likely to remain subdued for some time.
%
12
6
8
6
Australia
Figure 3.10
4
4
Industrial production in Asian economies
2
2
(annual percent change)
0
0
%
%
30
30
China
20
-4
20
10
10
0
0
-10
Other AxJ
-20
-30
1999
2001
Source: DataStream.
2003
2005
2007
Western economies + Japan
-2
1986
1990
1994
1998
-2
2002
2006
2010
-4
Source: DataStream, RBNZ estimates.
Note: Western economies includes the United States, United
Kingdom, and euro area economies.
Recent months have seen economic activity in all of our
-10
trading-partner economies continuing to surprise on the
-20
downside, prompting us to make large downward revisions
-30
to our projections. Figure 3.12 shows the extraordinary speed
of recent forecast revisions, with annual average growth
forecasts for 2009 revised down by 4.3 percentage points
Activity has deteriorated in Australia, with GDP falling
in the six months to February 2009. As has been the case
by 0.5 percent in the December quarter. Weaker activity in
in recent months, our forecasts are lower than the average
other regions is also dampening the outlook for Australian
forecast from Consensus Economics.
activity. Spot prices for some of Australia’s major exports
The outlook for trading-partner growth remains
have fallen sharply from their mid-2008 highs. Combined
considerably more uncertain than usual, even at near-term
with a soft outlook for external demand, this is expected
horizons, and the balance of risks remains firmly to the
to lead to lower export incomes and to dampen business
downside. Uncertainty about the global growth outlook
investment spending, both in the resource sector and in the
stems from two main sources. The first concerns the
economy more generally. We expect a significant further
persistence of financial headwinds, particularly given the
slowing in Australian domestic activity this year as the
potential for further feedback from deteriorating economic
labour market softens and household confidence remains
conditions. The second relates to the effectiveness of
subdued. However, the outlook for Australian activity is not
monetary and fiscal policy in generating a sustained recovery
as poor as it is in other regions (figure 3.11). This reflects the
in activity. Particular uncertainty surrounds the impact of
considerable monetary and fiscal stimulus which has already
policies targeted at households (such as tax cuts) in an
started to boost households’ disposable incomes, coupled
environment where confidence is weak and precautionary
saving is likely to be significantly higher than usual.
ReseRve Bank of new Zealand: Monetary Policy Statement, March 2009
13
Table 3.1
Forecasts of trading partner GDP
(calendar year, annual average percent change)
Country
2004
2005
2006
2007
2008f
2009f
2010f
Australia
3.8
2.8
2.9
4.0
2.3
0.4
1.4
Asia ex-Japan*
7.6
6.8
7.4
7.7
4.5
-2.2
4.1
United States
3.6
2.9
2.8
2.0
1.1
-2.5
1.0
Japan
2.7
1.9
2.0
2.4
-0.6
-4.4
-0.1
Euro area**
1.9
1.8
3.0
3.0
1.0
-2.3
0.4
United Kingdom
2.8
2.1
2.8
3.0
0.7
-3.3
0.4
Main trading partners (trade weighted aggregate)
4.1
3.3
3.7
4.0
1.9
-1.8
1.6
Source: DataStream, RBNZ estimates.
*
Includes China, Hong Kong, Malaysia, Singapore, South Korea and Taiwan.
**
Includes Austria, Belgium, Cyprus, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, Netherlands, Portugal,
Slovenia and Spain.
Note: Our projections do not incorporate the Australian GDP outturn for the December quarter. This result would imply some downside
to our projections.
Figure 3.12
Figure 3.13
Evolution of GDP-12 forecasts
Headline inflation in selected trading-partner
(annual average percent change)
economies
%
4
2008
3
2009
Consensus
2010
RBNZ
2
%
4
3
2
(annual)
%
8
6
1
1
0
0
-1
-1
-2
-2
0
Source: Consensus economics, RBNZ estimates.
Note: Figure 3.12 shows how our own forecasts and those from
Consensus Economics Inc. for growth in GDP-12 in 2008,
2009 and 2010 have been revised over time.
-2
Mar08 Sep08
Mar08 Sep08
Mar08 Sep08
Date of forecast
%
8
Australia
United States
4
2
6
4
2
Euro
area
1995 1997 1999
Source: DataStream.
United Kingdom
2001
2003
2005
2007
0
-2
Figure 3.14
Underlying inflation in selected trading-partner
International inflation
economies
developments and outlook
(annual)
Inflation in New Zealand’s trading-partner economies has
fallen sharply in recent months in response to the significant
weakening in global economic activity (figure 3.13). The
weakness in activity has resulted in sharp falls in commodity
%
5
%
5
4
4
Australia
3
3
United States
prices, particularly for food and fuel. It has also seen core
inflation rates begin to moderate in most of our tradingpartner economies (figure 3.14).
2
1
0
2
Euro
area
1997
1999
2001
Source: DataStream.
14
United Kingdom
2003
2005
2007
1
0
ReseRve Bank of new Zealand: Monetary Policy Statement, March 2009
Falls in international commodity prices over the past
the coming year as a result of the commodity price declines
year have also resulted in very sharp declines in the world
that we have already seen (figure 3.16). Further ahead, with
prices of many of New Zealand’s major imports. Notably,
a soft outlook for activity, core inflation pressures are likely
there have been sharp declines in fuel prices (figure 3.15).
to remain subdued, resulting in an extended period where
Prices for food and hard commodities have also declined. As
inflation in trading-partner economies remains lower than in
discussed in chapter 4, weaker inflation in trading-partner
recent years. Weakness in global activity is also expected to
economies has also begun to pass through to lower retail
have a dampening influence on commodity prices.
prices for some goods in New Zealand.
Figure 3.16
Figure 3.15
Trading partner consumer prices
Commodity prices
(annual and quarterly percent change)
USD/barrel
140
Index
140
120
120
100
100
80
Oil
80
60
60
40
40
Food (RHS)
20
20
0
0
1995 1997 1999 2001 2003 2005 2007
Source: Bloomberg, DataStream, RBNZ estimates.
Note: Food index = 40 at January 2006.
As a result, we have revised down the outlook for
inflation in our trading-partner economies. Annual inflation
%
6
Projection
5
2.5
4
3
%
3.0
2.0
Annual
1.5
2
1.0
1
0.5
0
Quarterly (RHS)
0.0
-1
-0.5
1990
1994
1998
2002
2006
2010
Source: DataStream, Consensus Economics Inc, RBNZ
estimates.
Note: The consumer prices measure shown is an importweighted average of CPI-inflation in New Zealand’s 12
major trading partners.
in trading-partner economies is projected to fall further over
ReseRve Bank of new Zealand: Monetary Policy Statement, March 2009
15
4
Recent developments in the domestic economy
Overview
Figure 4.1
The deteriorating global economic conditions, combined
Spread between 90-day bank bill rate and three-
with retrenchment in the household sector, are causing a
month OIS rate
contraction in domestic production. We now estimate that
%
10.0
Basis points
140
GDP declined in every quarter of 2008.
120
3-month bank bill rate
Falls in international commodity prices and global
demand have put downward pressure on the value of New
3-month OIS rate
Zealand’s exports. This has temporarily halted the trend
improvement in the current account balance. Activity in
the housing market continues to be weak, with household
100
7.5
80
Spread (RHS)
60
5.0
40
20
spending contracting.
Consequently, business confidence has fallen to new
lows. Despite lower costs, profitability has been squeezed,
causing businesses to pare back expenditure. The fall
0
2.5
Jan 06 Jul 06 Jan 07 Jul 07 Jan 08 Jul 08 Jan 09
Source: Reuters.
Note: Updated to 3 March 2009.
As the global economic outlook continued to
in demand has resulted in greater spare capacity in the
deteriorate, policy interest rates globally moved closer
economy, with increasing slack in the labour market.
Against this backdrop, annual inflation fell in the
to zero. The international financial market turmoil and a
December quarter from its September peak. Falling petrol
weakening domestic economy have also seen markets price
prices and moderating food price inflation helped drive
in further easing in New Zealand interest rates – placing
tradable inflation down, with some reduction in non-
downward pressure on the wholesale yield curve. The fall
tradable inflation.
in interest rates has been concentrated in short-end rates,
causing the yield curve to steepen further, in line with moves
internationally (figure 4.2).
Domestic financial market
Figure 4.2
developments
Wholesale interest rate curve
The continued deterioration in global financial markets has
seen domestic markets remain under pressure. Following
Basis points
50
moves internationally, credit pressures have eased since
0
last October, but have not improved significantly since the
-50
December Statement. The availability of credit continues
to be reasonable, although still relatively costly. Frictions in
money markets have held the spread between bank bills
overnight index swap (OIS) rate) around 30 basis points
-250
16
4.5
Net change
(LHS)
-150
-200
compared with spreads in other developed economies.
5.0
-100
and Official Cash Rate expectations (as measured by the
higher than pre-crisis levels (figure 4.1), but this is still low
%
5.5
Following
December MPS
4.0
3.5
Current
90d 180d 1yr
2yr
3yr
Source: Bloomberg.
Note: Current as at 3 March 2009.
3.0
4yr
5yr
7yr
10yr
2.5
ReseRve Bank of new Zealand: Monetary Policy Statement, March 2009
Financing and credit
The increase in the number of borrowers on floating-rate
The recent falls in wholesale interest rates have resulted in
mortgages is likely to speed up the decline in the effective
significant declines in floating and fixed mortgage rates,
mortgage rate (the average rate being paid on outstanding
although reductions have not fully matched the falls seen
mortgage debt). This rate is expected to fall by at least 200
in wholesale rates as yet (figure 4.3). The lowest mortgage
basis points in the next couple of years (figure 4.5).
rates are still typically only available for borrowers with loan-
Figure 4.5
to-value ratios less than 80 percent, with more leveraged
OCR and the effective mortgage rate
households finding financing difficult and more expensive.
%
10
%
Projection 10
9
Figure 4.3
Mortgage interest rates offered to new
8
borrowers
7
%
12
%
12
11
11
10
10
Floating
9
9
Dec
MPS
Effective mortgage rate
9
8
7
6
Central
OCR
6
5
5
4
4
3
3
1999
2001
2003
2005
2007
2009
Source: RBNZ.
Note: Central projections as at 27 February 2009.
8
8
7
7
Despite increased spreads between lending and
6
wholesale interest rates, our estimate of the effective
5
interest rate for non-residential borrowers has fallen more
6
Two-year fixed
5
1995 1997 1999 2001 2003
Source: RBNZ.
Note: Updated to 27 February 2009.
2005
2007
2009
rapidly than the effective mortgage rate (figure 4.6). This is
likely to reflect the fact that business loans are typically on
The duration of mortgages has also fallen as borrowers
rolling off fixed-term contracts elect to re-price onto floating
shorter-term or variable rate contracts, which allow firms to
benefit sooner from interest rate reductions.
As a result of lower demand and the lagged impact
or shorter-term fixed mortgages (figure 4.4). As more fixedrate contracts expire, it is expected that contracts will be
re-priced with substantially lower interest rates.
of high interest rates, credit growth to the household
Figure 4.6
Effective lending rates by sector
Figure 4.4
%
10
Estimated weighted time to re-pricing for
mortgages
Months
24
Months
24
9
%
10
Non-residential
(estimated)
9
8
8
Residential
18
18
Fixed
12
12
All mortgages
6
1999
2001
2003
2005
Source: RBNZ.
Note: Updated to 27 February 2009.
2007
7
7
6
2000
2002
2004
Source: RBNZ.
Note: Updated to 27 February 2009.
2006
2008
6
6
ReseRve Bank of new Zealand: Monetary Policy Statement, March 2009
17
sector has slowed markedly (figure 4.7). Credit secured on
External sector
housing grew by 3.8 percent in the year to January, with
Besides difficult credit conditions, the sharp deterioration
the outstanding stock of consumer credit barely above its
in global economic conditions has placed significant
level of a year previously. Meanwhile, lending growth to the
downward pressure on New Zealand’s external sector.
business sector remains relatively robust, despite a decline in
This has temporarily halted the trend improvement in the
lending from non-bank financial institutions. Annual growth
current account balance over 2008. The impact of weaker
to the agricultural sector remains high, although in part this
world growth on the external sector is two-fold. First, export
reflects strong lending to the sector in early 2008.
commodity prices have declined substantially over the past
Figure 4.7
year, causing a sharp reduction in New Zealand’s terms of
Credit growth by sector
trade. Second, falling offshore demand has contributed to
(annual)
weaker export volumes in recent quarters.
As a food exporter in world markets, prices of
%
25
%
25
20
20
significantly over the recent past. Most notably, spot prices
15
of dairy products have declined sharply from their record
Agriculture
15
10
Housing
5
10
0
-5
2000
2002
Source: RBNZ.
have also fallen in recent months. These price falls represent
Consumer
2004
2006
2008
peak, reversing the gains made in 2007 (figure 4.9). While
lagging behind the dairy price decline, global meat prices
5
Business
commodities in New Zealand’s export basket have declined
0
a significant erosion of wealth for New Zealanders – as
-5
measured by the terms of trade – and are likely to impact
on overall domestic economic activity going forward (see
Non-bank funding for businesses remains difficult and
costly as investor demand remains weak. This can be seen
in the domestic commercial paper market where the bidcover ratio remains low. The spread between the rate paid
on bank bills compared to that on commercial paper remains
chapter 5 for more details).
Figure 4.9
World dairy and meat prices
(SDRs, index = 100 at January 2006)
wide (figure 4.8).
Index
240
Index
240
Figure 4.8
200
200
160
160
Spread between commercial paper and bank bill
rates
Basis points
40
30
Ratio
7
6
Average bid-cover ratio (RHS)
120
80
120
Meat prices
Dairy prices
80
5
20
4
10
3
0
-10
A1+ rated issuance
2002 2003 2004 2005
Source: Bloomberg, RBNZ.
Note: Updated to 3 March 2009.
2006
2007
2008
40
1999
2001
2003
2005
2007
Source: ANZ National Bank Group Ltd, RBNZ estimates.
40
2
Weaker trading-partner demand is likely to have been
1
a key contributor to the sizeable contraction in export
0
volumes in the September quarter. While the decline was
broad based, the fall in export activity was most evident
in services and manufacturing exports (figure 4.10). Since
September, further declines in global activity have softened
18
ReseRve Bank of new Zealand: Monetary Policy Statement, March 2009
the outlook for export activity, with December’s merchandise
As a result of exports falling more than imports, the
trade data suggesting a continued contraction in export
annual goods balance worsened slightly over the June and
volumes. However, compared to many Asian economies,
September quarters of 2008 (figure 4.12). Similarly, the
exports from New Zealand have so far appeared to be much
annual services balance also dipped into negative territory
more resilient.
for the first time since 2001. While these declines were
Figure 4.10
partly offset by a slight improvement in the investment
Export volumes
income balance, the latter has remained firmly negative and
(seasonally adjusted)
continues to explain the bulk of the overall current account
95/96 $billion
6.0
95/96 $billion
3.0
deficit. As a result, the annual current account deficit
widened in the September quarter to 8.6 percent of GDP.
5.0
2.5
Manufactured
exports (RHS)
Figure 4.12
Current account
(annual, percent of GDP)
Primary exports
4.0
2.0
%
6
%
6
4
Services exports
(RHS)
3.0
1995 1997 1999 2001 2003 2005
Source: Statistics New Zealand, RBNZ estimates.
2007
1.5
4
Goods balance
2
2
0
0
-2
-2
Services balance
Similar to exports, import volumes also declined
-4
-4
significantly in the September quarter (figure 4.11). While
-6
-6
part of the decline can be attributed to volatility arising from
the lumpy nature of capital imports, widespread weakness
across consumption and intermediate imports was also
Current account
Investment income balance
balance
-10
1995 1997 1999 2001 2003 2005
Source: Statistics New Zealand.
-8
-8
2007
-10
evident. Given that the declines in domestic activity have
accelerated since September, and businesses reported
generally higher than desired stock levels over that period,
import demand has weakened further over the December
quarter. This fall in import volumes was reinforced by the
falls in international commodity prices, notably for oil, which
drove import values down further.
Household sector
2008 represented the beginning of a period of retrenchment.
The previous years had been characterised by a high level
of consumption relative to income, funded by borrowing.
However, tighter credit conditions, combined with falling
financial wealth, rising prices for necessities, and a correction
Figure 4.11
in house prices, reduced household spending volumes over
Import volumes
the year.
(seasonally adjusted)
95/96 $billion
12
95/96 $billion
4
Activity in the housing market remained weak through
the second half of last year. House sales have remained at
the same low level since March 2008. Residential investment
activity declined by a fifth in the year to the September
9
3
Goods imports
quarter. The weakness was also evident in house prices,
which fell by 6.7 percent over the same period. The number
6
2
Services imports (RHS)
3
1995 1997 1999 2001
Source: Statistics New Zealand.
2003
2005
of dwelling consents fell further in January, to the lowest
level since the series began in 1965 (figure 4.13).
1
2007 End 08
ReseRve Bank of new Zealand: Monetary Policy Statement, March 2009
19
Figure 4.13
has stabilised at a level lower than that prevalent in recent
House sales, ex-apartment consents and real
years (figure 4.15).
residential investment
Figure 4.15
(seasonally adjusted)
%of GDP
6.5
Per thousand working aged persons
4.0
Residential
investment
6.0
3.5
5.5
5.0
4.5
Ex-apartment
consents (scaled)
REINZ house sales
(adv 6 months, RHS )
Real retail sales growth and confidence
Annual %
10.0
7.5
5.0
120
2.5
2.5
110
2.0
0.0
100
-2.5
-5.0
1995 1997 1999 2001 2003 2005 2007 2009
Source: REINZ, Statistics New Zealand, RBNZ estimates.
130
Real retail sales
3.0
1.5
4.0
Index
140
1.0
The adjustment to households’ spending evident in the
housing market through 2008 was mirrored by purchases
of motor vehicles. The tightening in credit availability also
played a role, with several providers of vehicle finance no
longer undertaking new lending. Motor vehicle retailing was
down 17.4 percent in the year to the December quarter, and
registrations in February point to further weakness (figure
4.14).
-7.5
Westpac consumer
confidence
(adv 1 quarter, RHS)
1998
2000
2002
Roy Morgan
consumer confidence
(adv 2 months, RHS)
2004
2006
2008
90
80
70
Source: Statistics New Zealand, Roy Morgan, Westpac McDermott
Miller.
Business sector
There are increasing signs of stress in the business sector.
Widespread weakness in the domestic economy, combined
with the deepening global recession, has seen demand
deteriorate rapidly for businesses. This is reflected in a sharp
increase in the number of businesses viewing ‘lack of orders’
as their biggest constraint to growth in recent Quarterly
Figure 4.14
Survey of Business Opinion (QSBO) releases.
Car registrations and private vehicle
In addition to falling demand, businesses – especially
consumption
those in the real estate development sector – continue to
(annual percent change)
%
60
%
60
40
40
face tight credit conditions. As a result of these factors,
businesses are becoming increasingly downbeat about
their outlook, with survey measures of business confidence
Car registrations
20
20
Figure 4.16
0
0
Business outlook for own activity
-20
-20
(seasonally adjusted)
-40
-40
Index
75
-60
-60
50
Private vehicle consumption
1995 1997 1999 2001 2003 2005 2007
Source: Statistics New Zealand, RBNZ estimates.
Excluding motor vehicles, retail sales were flat in the
December quarter, despite the income boost from tax cuts,
30
25
0
0
lower petrol prices and falling interest rates. Consumer
confidence rebounded in September from its mid-year lows.
But the worsening outlook for activity and employment since
then has checked any further improvement, and confidence
20
Index
60
NBBO own activity
QSBO domestic trading activity (RHS)
-25
-50
1990
1994
1998
2002
2006
-30
-60
Source: NZIER, ANZ National Bank Group Ltd, RBNZ estimates.
ReseRve Bank of new Zealand: Monetary Policy Statement, March 2009
generally falling to their lowest levels on record in late 2008
manufacturing and service sector production. In addition,
and early 2009 (figure 4.16).
extraction sector activity fell almost 10 percent over the
While falling demand has dampened businesses’
period as production from the Tui oil field slowed.
revenue, recent falls in global commodity prices, particularly
Data available to date suggest that the decline in activity
oil, have been providing a partial offset. Despite the weaker
has accelerated over the December quarter. Construction
New Zealand dollar, substantial declines in domestic petrol
activity is likely to have slumped, in line with the steep falls in
and other raw material prices towards the end of last year
building consents over the second half of last year. Indicators
have significantly eased cost pressures for businesses, with
for manufacturing activity have also fallen sharply over the
the Producer Price Index for inputs falling by 2.2 percent in
period, suggesting a further substantial contraction. We
the December quarter.
expect weakness from these two sectors to explain the bulk
Although providing some relief, costs have not reduced
of a decline in aggregate activity in Q4. If this occurred, it will
sufficiently to prevent business profitability from sliding.
be the first time that GDP has declined for four consecutive
Survey measures of changes in corporate profitability have
quarters since 1990 (figure 4.18).
generally fallen to their lowest levels in almost two decades.
In reaction, businesses are paring back spending significantly,
with the survey balances for investment and employment
intentions recently falling to record lows (figure 4.17). These
foreshadow additional deterioration in business investment
and employment. The near-term prospects for investment
are further impaired by the rising cost of capital goods
Figure 4.18
GDP growth
(quarterly, seasonally adjusted)
%
3
%
3
2
2
1
1
0
0
-1
-1
-2
-2
caused by the depreciating New Zealand dollar.
Figure 4.17
National Bank Business Opinion investment and
employment intentions
Index
40
Index
40
Investment intentions
20
20
0
0
-3
1988
1992
1996
Source: Statistics New Zealand.
2000
2004
2008
-3
Productive capacity and the labour
market
-20
Employment intentions
-20
As economic activity declined, further signs of easing capacity
pressures have emerged. In particular, the QSBO measure of
-40
1995
1999
2003
Source: ANZ National Bank Group Ltd.
2007
-40
capacity utilisation – which has been a useful indicator of
capacity pressures in the economy – has continued to fall
sharply, to a level not seen since 2000 (figure 4.19). This
Output
represents a very rapid change in resource pressure for the
Against this backdrop of weakening economic conditions
economy, from an estimated stretched position at the start
locally and internationally, GDP contracted 0.4 percent in the
of the year to a position of spare capacity within just a few
September quarter 2008 – the third consecutive quarterly
quarters.
decline. The weakness was widespread across sectors,
with the falls in export and household demand affecting
ReseRve Bank of new Zealand: Monetary Policy Statement, March 2009
21
Figure 4.19
Figure 4.20
Capacity measures
Labour costs and wages – private sector
(seasonally adjusted)
(annual percent change)
Normalised
3
Normalised
3
2
Capacity utilisation 2
1
1
0
0
-1
Skill
shortages
-1
-2
-2
-3
-3
-4
1990
1994
1998
Source: NZIER, RBNZ estimates.
2002
2006
-4
Easing capacity pressure has reduced the tightness in the
%
4.5
%
9
QES total weekly
gross earnings (RHS)
4.0
8
7
3.5
6
3.0
5
2.5
4
2.0
LCI wage index
3
1.5
2
1.0
1995 1997 1999 2001
Source: Statistics New Zealand.
2003
2005
2007
1
CPI inflation
labour market. Many firms have moved from a position of
Easing capacity pressures and weaker demand have put
actively acquiring labour in the first half of 2008 to seeking
downward pressure on businesses’ pricing intentions, which
to reduce headcount. This saw unemployment rise steadily
have fallen markedly in recent outturns. Consequently,
and hours worked decline in recent quarters. In light of this
measures of business inflation expectations declined
easing in labour market pressures, survey measures of skill
significantly in recent quarters. The Reserve Bank measure
shortages also fell, although recruiting skilled labour is still
of two-year-ahead inflation expectations fell further in
difficult in some areas.
the March quarter to 2.3 percent, notably down from its
The softer labour market is putting downward pressure
September 2008 peak of 3.0 percent (figure 4.21). Relative
on wages, with wage growth decelerating markedly in the
to December, the decline in expectations was driven by the
final quarter of 2008. According to the December quarter’s
reduced inflation expectations of businesses to match the
labour market data, the Labour Cost Index increased 0.7
already lower expectations of the financial sector.
percent – a significant reduction from the 1.1 percent
growth in the previous quarter. Other measures of gross
nominal household income, such as QES gross earnings,
have also registered sharply lower growth over the same
Figure 4.21
Headline CPI and inflation expectations
(annual)
period (figure 4.20). This is consistent with reports from our
%
6
%
6
business contacts.
5
5
4
4
Headline CPI
inflation
Two-year ahead
3
3
2
2
Mean +/- standard
deviation
1
0
1995 1997
Source: RBNZ.
22
1999
2001
2003
2005
1
2007
0
ReseRve Bank of new Zealand: Monetary Policy Statement, March 2009
The drop in international commodity prices and the
Overall, these components resulted in a sharp decline in
weakness in domestic demand combined to drive actual
tradable inflation (figure 4.23). To date there is less evidence
inflation sharply lower in December. Annual CPI inflation
of a broad-based moderation in non-tradable inflation,
dropped to 3.4 percent from its September peak of 5.1
although as discussed in chapter 5 we expect this to happen
percent. The main drivers of the fall in the annual rate were
over the coming year as weaker demand, lower inflation
falling petrol prices and construction costs and a moderation
expectations and slower wage growth take effect.
in food price inflation.
The fall in international oil prices contributed to a 22.4
percent decline in petrol prices in the December quarter.
Since December, petrol prices have retraced some of this fall
Figure 4.23
CPI tradable and non-tradable inflation
(annual)
as refined oil prices have rebounded and the New Zealand
%
8
dollar has depreciated. But petrol prices still remain markedly
6
down on their July peak. With input prices falling, and given
%
8
Non-tradable
6
4
4
CPI
the significant retraction in demand, there has been pressure
2
2
construction costs in the December quarter.
0
0
Figure 4.22
-2
on builders to reduce prices (figure 4.22), resulting in falling
QSBO builders’ costs and selling prices
-4
(seasonally adjusted)
Index
100
Index
100
80
1995
1997
1999
2001
2003
2005
2007
-2
-4
Source: Statistics New Zealand.
80
Average costs
60
60
40
40
20
20
0
0
-20
Tradable
-20
Average prices
-40
-40
-60
1990
1994
Source: NZIER.
1998
2002
2006
-60
In addition, there are some signs that food price inflation
is moderating. Vegetable prices fell in the December quarter
from their September spike, and meat prices fell in January,
as the price declines in global markets translated to lower
retail prices. The typical lag in the transmission of commodity
prices to retail prices means that food price inflation is likely
to moderate further, despite some offset from the weaker
New Zealand dollar.
ReseRve Bank of new Zealand: Monetary Policy Statement, March 2009
23
24
ReseRve Bank of new Zealand: Monetary Policy Statement, March 2009
3.2
NBBO - inflation one-year-ahead (quarterly average)
3.2
2.5
2.5
2.7
2.5
AON Economist survey - inflation one-year-ahead
AON Economist survey - inflation four-years-ahead
2.7
2.6
2.7
2.6
3.1
2.6
2.8
3.0
2.7
Dec
2007
Sep
Jun
Inflation expectation measures
RBNZ Survey of Expectations - inflation one-year-ahead
RBNZ Survey of Expectations - inflation two-years-ahead
3.2
2.0
1.8
5.9
2.7
1.9
1.8
3.3
2.4
2.1
2.1
4.1
3.0
3.5
3.5
4.9
3.0
2.8
16.9
CPI weighted median (of annual price change)
CPI ex food, petrol and government charges
CPI ex food and energy
GDP deflator (derived from expenditure data)
2.5
2.3
3.7
4.9
3.1
-0.3
-5.9
3.2
Dec
2.7
2.0
4.1
4.7
3.9
-0.5
-8.4
CPI Components
CPI non-tradables
Non-tradables housing components
Non-tradables ex housing, cigarettes and tobacco components
CPI tradables
Petrol
1.8
Sep
2007
Other inflation measures
Factor model estimate of core CPI inflation
CPI trimmed mean (of annual price change)
2.0
Jun
CPI
(annual)
Measures of inflation and inflation expectations
Table 4.1
3.3
2.6
3.1
3.0
2.7
Mar
3.2
1.9
1.6
6.1
3.0
3.5
3.5
4.6
3.1
3.4
20.5
3.4
Mar
3.4
2.6
3.1
3.3
2.9
Jun
3.4
1.9
1.5
3.7
3.2
3.8
3.4
4.0
3.1
4.8
25.9
4.0
Jun
2008
2008
3.7
2.7
3.5
3.6
3.0
Sep
3.7
2.2
2.1
1.6
3.4
4.0
4.1
3.2
4.5
6.3
29.3
5.1
Sep
3.5
2.7
3.0
2.8
2.7
Dec
3.0
2.0
2.2
n/a
2.8
3.1
4.3
2.4
5.1
2.3
-4.8
3.4
Dec
n/a
2.5
2.1
2.2
2.3
2009
Mar
5
The macroeconomic outlook
The influence of the weak global outlook on the New
by the European Union, we now expect further declines in
Zealand economy has intensified, and adds to our already
dairy prices.
weak outlook for domestic household spending. Many of
Our outlook for weaker meat prices is the other key
our trading partners are currently in, or likely to move into,
driver behind our downward revision to export commodity
recession. Trading-partner economic activity is expected to
prices. We now project a sharp decline in aggregate export
contract in 2009, and to grow only modestly thereafter.
prices over 2009 in line with our expectations for global
As a result, international prices for our exports are likely to
growth (figure 5.1). In real terms, export commodity
fall more than assumed in the December Statement, led by
prices are projected to fall to a historically low level before
lower dairy prices. Furthermore, continued turbulence in
recovering to around average levels.
global financial markets has seen credit conditions remain
tight.
We now expect quarterly declines in GDP growth in New
Zealand to continue over the first half of 2009. Assuming
the projected recovery in the world economy eventuates
Figure 5.1
OTI world export prices (goods)
(seasonally adjusted)
Index
850
Projection
Index
850
and credit markets normalise, we expect the New Zealand
economy to gradually recover late this year driven by
750
750
650
650
550
550
strong growth in government spending, while higher net
export activity and business investment are expected to
add support to the recovery later in the projection. There is
increased uncertainty over the timing and magnitude of the
upturn, and a recovery will be highly dependent on global
developments and continued strong growth in government
spending over the coming year. Overall, these developments
450
2002
2004
2006
2008
450
2010
Source: Statistics New Zealand, RBNZ estimates.
There have been some large movements in international
point to a substantial rebalancing of the domestic economy,
given weak household spending and business investment.
2000
oil prices over the past year. Overall, the sharp decline in
There are widespread signs of growing spare capacity in
late 2008 meant that oil prices are slightly lower than was
the domestic economy, and we expect this to flow through
assumed in the December Statement, consistent with a
to a significant easing in inflation pressures. Furthermore,
further weakening in the global activity outlook. We assume
the effects of the weak global economy on import prices
that oil prices will rise gradually over the projection (figure
mean that tradable inflation is expected to be subdued
5.2).
despite the depreciation in the New Zealand dollar. As a
result, we expect annual inflation to hold around 2 percent
throughout most of the projection.
Figure 5.2
Dubai oil price
USD/barrel
140
USD/barrel
140
Projection
120
120
100
100
As discussed in chapter 3, there has been further marked
80
80
deterioration in global growth since the December
60
60
Statement. This has flowed through to a continued sharp
40
40
decline in global commodity prices. In particular, dairy prices
20
20
have fallen to such an extent that they have now reversed the
0
The terms of trade
gains of 2007. Partly reflecting export subsidies announced
2000
2002
2004
2006
Source: Datastream, RBNZ estimates.
ReseRve Bank of new Zealand: Monetary Policy Statement, March 2009
2008
2010
0
25
Adding to the large declines in oil prices over the
Figure 5.4
second half of 2008, we also expect ex-oil import prices to
Nominal TWI assumption
fall substantially over 2009, in line with weaker commodity
Index
75
prices more generally. Despite sharply lower import prices,
Projection
Index
75
70
70
trade over the course of the projection (figure 5.3).
65
65
Figure 5.3
60
we still expect a substantial decline in the goods terms of
OTI goods terms of trade
Index
130
Projection
Index
130
120
120
110
110
100
100
Dec MPS
55
60
55
Central
50
45
2000
2002
2004
2006
2008
2010
Source: Statistics New Zealand, RBNZ estimates.
50
45
Trade volumes
Despite the lower New Zealand dollar, we expect export
volumes to continue to decline sharply over 2009 given the
90
2000
2002
2004
2006
2008
2010
Source: Statistics New Zealand, RBNZ estimates.
90
dominance of weaker global demand. In addition, evidence
of accumulated stockpiles suggests this weak demand will
be persistent, particularly for manufactured and possibly
forestry exports. Dairy export volumes declined sharply over
Exchange rate
2008, which we expect to persist in the near term.
The New Zealand dollar TWI has continued to depreciate
Our outlook for a sharp decline in business investment
sharply over the past few months, and our assumption
drives our expectations of a continued decline in import
is for the depreciation to continue until mid-2010 (figure
volumes over 2009. The high import content in business
5.4). There has been a substantial downward revision in our
investment means that this weaker outlook implies a
projection for the New Zealand dollar over the medium term,
reduction in the import penetration ratio, particularly over
given lower export prices and a higher country risk premium
2009 (figure 5.5).
are likely to reduce the attractiveness of our currency and
thus lead to a further depreciation in the New Zealand dollar.
Given heightened risk aversion in markets, there is a risk of a
sharper depreciation in the near term. More generally, there
is increased uncertainty over how the deteriorating growth
outlook of our trading partners will affect the relative
performance of various currencies.
In addition to offsetting some of the effect of falling
Figure 5.5
Import penetration ratio
(percent of GDP)
%
45
Projection
%
45
40
40
35
35
30
30
25
25
international export prices, the lower New Zealand dollar is
also expected to boost export activity and encourage import
substitution by New Zealand households and businesses
over the medium term.
20
1990
1994
1998
2002
2006
Source: Statistics New Zealand, RBNZ estimates.
26
2010
20
ReseRve Bank of new Zealand: Monetary Policy Statement, March 2009
The services balance is now projected to be weak in
income balance – from weaker domestic profitability and
the near term, partly as a result of a large decrease in the
lower interest rates on debt – also supports the improvement
services terms of trade. Unlike the goods terms of trade, a
in the current account balance.
depreciation in the New Zealand dollar causes the services
terms of trade to fall, given the price of imports of services
(the cost for New Zealanders travelling abroad) in New
Zealand dollars increases while the price of exports of
Figure 5.7
Current account
(annual, percent of GDP)
services (tourist activities in New Zealand) are unchanged
%
6
in New Zealand dollars. Although this weaker outlook for
4
the services terms of trade reduces the services balance in
2
2
the near term, we expect the lower New Zealand dollar to
0
0
also drive an improvement in the services balance later in
-2
the projection (figure 5.6). This is primarily from a decline
-4
in imports volumes relative to services exports, as New
Zealanders choose to take holidays around New Zealand
rather than go overseas and foreign tourists are enticed to
return to New Zealand by the low New Zealand dollar.
%
6
Goods &
Services
Projection
-2
Current account
-6
-8
4
-4
-6
Investment
income
-8
-10
2000
2002
2004
2006
2008
2010
Source: Statistics New Zealand, RBNZ estimates.
-10
Figure 5.6
Business investment
Services balance
Business surveys point to a substantial reduction in
(annual, percent of GDP)
%
2
investment intentions, as weak domestic demand reduces
Projection
%
2
the need for firms to invest. As a share of trend output, we
expect core business investment to decline to levels similar
1
1
0
0
-1
-1
to the recession of the early 1990s (figure 5.8).
Figure 5.8
-2
2000
2002
2004
2006
2008
2010
Source: Statistics New Zealand, RBNZ estimates.
-2
Business investment
(excluding computer and intangible assets,
percent of trend output)
%
14
Projection
%
14
13
13
12
12
11
11
Partly as a consequence of the weaker terms of trade, we
10
10
now expect the annual current account balance to largely
9
9
The current account
track sideways for the remainder of this year before improving
thereafter (figure 5.7). We expect the improvement in the
8
1990
1994
1998
2002
2006
Source: Statistics New Zealand, RBNZ estimates.
2010
8
goods balance to contribute to an improvement in the current
account balance beyond 2009. While the improvement in
the goods balance reflects the rebalancing taking place in
the domestic economy, this adjustment has been impaired
by weak global developments. The improving investment
ReseRve Bank of new Zealand: Monetary Policy Statement, March 2009
27
Businesses are expected to cut investment spending as
end of 2007 to a peak of 6.8 percent early in 2010 (figure
weaker demand flows through to growing spare capacity.
5.9, see box C for further discussion of our expectations
Continued constraints in the availability of credit are also
for the unemployment rate). Beyond that, we expect the
likely to weigh substantially on investment spending.
unemployment rate to begin falling in line with the recovery
Furthermore, the depreciation in the New Zealand dollar
in aggregate demand.
has increased the price of imported plant and machinery, as
Figure 5.9
reflected in the December quarter Capital Goods Price Index.
Employment growth and the unemployment
Hence, we expect a sharp broad-based decline in business
rate
investment such that business investment is extremely weak
(seasonally adjusted)
over the projection.
Although there is much uncertainty over the timing, we
are expecting a tentative recovery in business investment in
Annual %
6
Projection
%
12
Employment
4
10
2
8
0
6
-2
4
2010 from very low levels. Supporting this recovery will be an
improvement in firms’ margins and profits as cost pressures
ease after a sustained period of weak demand. Furthermore,
the low level of investment over 2008 and 2009 may leave
many firms with worn-out capital equipment which would
need replacing. The boost to export demand later in the
projection would also increase the need for investment,
particularly for manufacturing firms. In addition to the lower
New Zealand dollar, lower interest rates will also stimulate
Unemployment (RHS)
-4
1990
1994
1998
2002
2006
Source: Statistics New Zealand, RBNZ estimates.
2010
2
The softening in the labour market is also reflected
in a projected fall in wage inflation. Given the substantial
business sector activity.
easing in skill shortages, the upward pressure on wages
has reduced significantly. There are signs quarterly wage
growth has already started to decline, and anecdotes from
The labour market and net
businesses indicate wage increases will likely be lower for
immigration
the year ahead.
The deteriorating outlook for demand has also seen businesses
pare back their employment intentions substantially. There
were already signs of some softening in the labour market
in the December quarter last year, and we now expect an
annual decline in employment of 3.1 percent over 2009.
While our outlook for net immigration is largely
unchanged, we expect that both departures and arrivals will
be lower as the weakening global outlook reduces the extent
of labour force movement between countries. On balance,
we see greater risk of a sharper decline in departures, given
the reduced availability of jobs overseas in sectors which
have traditionally attracted young professionals.
We expect the labour force participation rate to ease
as some job seekers not able to find employment leave the
labour force. Despite this, we project the unemployment
rate to increase from the record low of 3.4 percent at the
28
ReseRve Bank of new Zealand: Monetary Policy Statement, March 2009
Box C
In addition, recent official data, along with reports from
Prospective trends in New Zealand’s
labour market
business contacts, suggest that many firms are looking to
react to the current slowdown by reducing the number of
hours staff work, rather than make staff redundant. This,
Over the past 12 months, activity in the labour market
has slowed sharply. Firms’ employment intentions have
reduced markedly, and there have been widespread reports
of job losses. It seems likely that a significant reduction in
employment will occur over the coming year.
along with recent legislation increasing minimum leave
requirements, is expected to see the number of hours
per worker remain low over the projection. All else equal,
this would cushion the impact of the current recession on
employment numbers.
While this is likely to cause the unemployment rate
to increase considerably, we expect its eventual peak to
be well below that of the early 1990s, largely reflecting
the fact that New Zealand entered the current recession
with very few unemployed people. In addition, we expect
two important labour market trends to mitigate the extent
to which the unemployment rate increases over the
projection.
Second, over the past two decades, labour market
participation has trended steadily higher. While strong
employment growth will have encouraged higher
participation over this time, part of the increase is also
related to New Zealand’s ageing population. As the
proportion of the population in the high-participation 25
-to-55 year old age cohorts has increased, the aggregate
participation rate trended higher. This trend has caused the
First, over the past decade the average number of
hours worked per employee has declined steadily (figure
unemployment rate to be higher than would otherwise be
the case for any given level of employment.
C1). Some part of the decline in hours per worker is almost
certainly related to the progressive tightening in the labour
market through this time. And with employment now
falling, hours per worker could well increase.
However, over the coming decade or so, this effect
is likely to reverse as the population ages further and the
proportion of the population in the low-participation 60
years and above cohorts increases. We project the impact
of this to more than offset any gains in participation related
Figure C1
to cash-constrained workers being forced to continue
Hours worked per employee
searching for employment.
(seasonally adjusted)
Hours
36
Hours
36
Figure C2
Labour force participation rate
35
35
(seasonally adjusted)
%
70
34
34
33
33
32
1986
1990
1994
1998
2002
2006
32
Source: Statistics New Zealand, RBNZ estimates.
However, some part of the trend decline in hours
Projection
%
70
69
69
68
68
67
67
66
66
65
65
64
64
worked per person is also likely to be longer lasting. For
63
1986
example, increased labour market participation by females
Source: Statistics New Zealand, RBNZ estimates.
1990
1994
1998
2002
2006
2010
63
and older workers, who typically work fewer hours per
week, is unlikely to reverse as the economy slows.
ReseRve Bank of new Zealand: Monetary Policy Statement, March 2009
29
As such, while the participation rate is likely to decline
That said, as discussed elsewhere in the Statement,
over the projection (figure C2), in line with reduced labour
there is a clear risk that economic activity turns out weaker
demand and falling employment, we expect this decline
than we project. Given this, while we believe continued
to be greater than a standard discouraged-worker effect
low hours per worker and reduced participation will limit
would imply. All else equal, this decline in the participation
the extent to which unemployment rises, there is a clear
rate cushions the impact on the unemployment rate of the
risk that the unemployment rate increases to a greater
current slowdown in aggregate activity.
extent than we currently project.
Household spending and house
Thus, we expect consumer spending to remain very weak
over 2009, such that by the end of the projection period
price inflation
As discussed in chapter 4, the deteriorating outlook for
household balance sheets and income prospects mean we
now project the retrenchment of household sector spending
to continue. This underpins the rebalancing we expect to
take place in the domestic economy.
Households are more circumspect and are trimming
expenditures accordingly. This is despite factors supporting
household purchasing power, including lower fuel prices,
lower personal taxes, and falling mortgage interest rates.
We expect that household consumption and residential
investment spending, as a share of total output, will decline
sharply over the projection period (figure 5.10).
Given the predominance of fixed-rate mortgages and
tight credit pressures, the near-term benefit to householders
of recent Official Cash Rate reductions is likely to be quite
protracted relative to previous easing cycles.
the level of per-capita consumption is expected to remain
well below current levels. Lower durable consumption is
envisaged to contribute the most to near-term weakness in
consumption activity.
A key factor driving the weak outlook for consumption
is reduced household income, as a result of the weaker
external backdrop, lower wages, declining employment
and lower interest income. On top of this, households are
expected to have lowered their propensity to consume as
they reduce their reliance on borrowing and save more
to repair balance sheets. Falling household wealth and
an increasingly uncertain employment outlook are likely
to induce more precautionary saving. Reflecting this, our
projection implies a sizeable improvement in the household
saving rate from around -10 percent recently, to about -2
percent of household disposable income by the end of the
projection.
Figure 5.10
Further out in the projection, a very modest recovery
Household spending and saving rate
in household spending ensues, supported by (still positive)
%of trend GDP
70
growth in inflation-adjusted household disposable incomes
68
%of household disposable income
10
Projection
Household
spending
5
and the lagged effects of tax cuts.
In the housing market, indicators such as house sales
and consents suggest that residential investment is likely
66
0
64
-5
to continue falling over the first half of 2009. A modest
recovery is expected to ensue in the latter part of 2009. This
recovery is a consequence of the very low starting point for
62
60
-10
Saving rate
(RHS)
1990
1994
1998
2002
2006
Source: Statistics New Zealand, RBNZ estimates.
2010
-15
residential investment activity and is predicated on there not
currently being an oversupply of housing in New Zealand.
As a share of total output, the level of residential investment
is expected to remain historically low over the course of the
projection.
30
ReseRve Bank of new Zealand: Monetary Policy Statement, March 2009
We expect further downward adjustment in house
Gross domestic product
prices to continue over 2009, with prices tracking sideways
The outlook for economic activity has weakened considerably
thereafter. From their peak in 2007, nominal house prices
since the December Statement. The sharp deterioration in
are projected to fall almost 20 percent by early 2010, or
global and domestic conditions lead us to now project the
around 25 percent in real terms. The fall in prices is expected
decline in economic activity, which began in 2008, to extend
to occur slightly earlier than projected in the December
to mid-2009, with no material recovery until 2010.
Statement. Such correction would bring prices to a level
Data since the December Statement point to sizeable
more in line with fundamentals. There remains a risk that
declines in quarterly economic activity over December
house prices will fall by more than this.
2008 and March 2009. While activity in most parts of
the economy is estimated to be fairly weak, much of the
slowdown is driven by lower activity in the construction and
Government
manufacturing sectors.
Fiscal policy is expected to provide significant support
As discussed earlier in the chapter, weak global demand
to economic activity over the projection. Projections in
is expected to weigh heavily on demand for exports.
Treasury’s December Economic and Fiscal Forecasts indicate
Furthermore, the poor business sentiment and rising
sizeable increases in government spending over 2009 and
unemployment is expected to exert additional significant
into 2010 (figure 5.11). Further cuts to personal tax are
downward pressure on growth over 2009. With little growth
also expected to boost household disposable incomes and
coming from the private sector, significant government
support household spending.
spending is expected to provide some support to the mild
recovery later in 2009.
Figure 5.11
Beyond this, the recovery is expected to gain impetus
Fiscal impulse
as export sector activity and business investment pick up.
(percent of GDP, June years)
%
2
%
2
Tighter
Significant stimulus from lower interest rates, depreciation
in the New Zealand dollar, infrastructure spending, ongoing
1
1
government spending and an expected recovery in world
0
0
growth is projected to support the economy’s recovery
-1
-1
-2
-2
dependent on global developments over the coming year
-3
(see box D for a comparison of the current recession to
-3
-4
Looser
1995 1997 1999 2001 2003 2005 2007 2009 2011
-4
back to an annual average growth of 4.8 percent by 2011.
Certainly, the timing and magnitude of an upturn is highly
previous recessions and that of other countries).
Source: The Treasury, RBNZ estimates.
In the absence of higher government spending,
the trough in economic activity is likely to have been
deeper, and the subsequent recovery in economic activity
delayed. Towards the end of the projection, growth in
government spending volumes, which includes some
planned infrastructure projects, slows in relation to growth
in total economic activity. Largely a consequence of weaker
household spending, the government spending share of
total GDP is expected to finish the projection at a higher
level relative to the December Statement.
ReseRve Bank of new Zealand: Monetary Policy Statement, March 2009
31
Box D
a number of observations. First, Australia is projected to
The New Zealand recession in
perform marginally better than most, but is still expected
to suffer. Second, largely due to New Zealand-specific
context
factors, New Zealand’s recession started earlier than those
While all recessions are different, it is useful to put the
current recession in the context of previous New Zealand
recessions1 and the recessions currently being experienced
by some of our main developed-economy trading
partners.
in the economies considered here. Third, at six quarters,
the projected length of the New Zealand recession is
similar to the other countries. Fourth, we are projecting
New Zealand to experience a slightly deeper trough than
the United States, but not as deep as the Japanese or
Figure D1 plots the profile for the level of quarterly
New Zealand GDP during the main recessions since 1960.
The red line shows the current recession, with the dotted
line reflecting the central projection. The first thing to note
is that the current recession, if it progresses as projected,
will be the second-longest New Zealand recession since
1960, with the longest occurring in the 1970s. The second
United Kingdom economies.
Figure D2
The 2008/09 recessions
(quarterly GDP level at December 2007 = 100)
Index
104
Index
104
Australia
102
102
thing to note is that so far the current recession has been
100
shallower than many of the other recessions.
Figure D1
98
96
(quarterly GDP level at start of recession = 100)
Index
101
100
100
99
99
98
Current
97
97
Early 1990s
95
Mid-1970s
1
2
3
4
5
Quarters
6
7
8
UK
96
Japan
Index
101
98
98
New Zealand
New Zealand’s post-1960 recessions
96
100
US
94
2008
2009
94
Source: National sources, RBNZ estimates.
Note: Does not incorporate December 2008 outlook for
Australia.
While there is considerable uncertainty around
this outlook, with the risks being for a later and slower
recovery, there are many reasons why the outlook for
96
the New Zealand economy is brighter than it is for these
95
other countries – as discussed in chapter 2. In particular,
we see the relative health of the banking sectors in the
Source: Hall and McDermott,2 RBNZ estimates.
New Zealand and Australian economies as explaining the
While it is useful to consider previous recessions,
projected out-performance by these economies.
the drivers of the current recession are clearly different.
Therefore, we consider the current New Zealand recession
with those being experienced internationally, again with
forecasts shown by the dotted lines (figure D2). There are
Finally, a recent paper that looked at previous recessions
in a wide range of countries showed that recessions
associated with financial crises are typically longer (lasting
two years on average) than those that are not (lasting less
than a year).3 This adds to the view that there is downside
1
2
32
For a detailed discussion of previous New Zealand
recessions, see Reddell, M and C Sleeman (2008),
“Some perspectives on past recessions”, Reserve Bank
of New Zealand Bulletin, Vol. 71, No. 2, June.
Hall, V and C.J McDermott (2007), “A Quarterly PostWorld War II Real GDP Series for New Zealand”, Motu
Working Paper 07 to 13, Motu Economic and Public
Policy Research.
risk to the projections for activity in our trading partners,
and thus for New Zealand activity.
3
Reinhart, C and K. Rogoff, (2008), “The aftermath
of financial crises”, paper for American Economic
Association presentation.
ReseRve Bank of new Zealand: Monetary Policy Statement, March 2009
Inflation
Annual headline inflation is forecast to move higher in
The growing spare capacity stemming from weak demand
the final quarter of 2009 as the petrol price declines in the
has flowed through to lower inflation pressures. This saw a
December quarter drop out of the annual figure. Later in
marked decline in annual CPI inflation from 5.1 percent in
the projection, annual CPI inflation is expected to settle at
September to 3.4 percent in December. While the decline
around 2 percent (figure 5.13). Given the history of positive
was primarily driven by the sharp fall in petrol prices, key
inflation shocks over the past few years, the succession of
areas of non-tradable inflation also eased. We expect further
negative shocks – which started in the December quarter of
easing in annual inflation over 2009, such that it is likely to
last year and are expected to continue throughout 2009 –
fall briefly below 1 percent in the September quarter.
should balance out to leave inflation around the middle of
As a consequence of weakness in global and domestic
the target band over the medium term.
demand, the short-term outlook is for easing tradable
Figure 5.13
and non-tradable inflation (figure 5.12). Our forecast of
CPI inflation
lower international import prices is the key driver behind
(annual)
expectations of subdued tradable inflation over 2009,
%
6
despite the depreciation in the New Zealand dollar.
Figure 5.12
Tradable and non-tradable inflation
(annual)
Projection
%
6
5
5
4
4
3
3
%
8
2
2
6
1
1
4
4
0
2
2
0
0
-2
-2
Emissions Trading Scheme Review Committee to review the
-4
scheme and related matters, we have removed the effects
%
8
Projection
6
Non-tradable
Tradable
-4
2000
2002
2004
2006
2008
2010
Source: Statistics New Zealand, RBNZ estimates.
We also expect the easing in capacity pressures to
flow through to non-tradable inflation. In particular, the
unexpected decline in construction costs in the December
quarter indicates the easing capacity pressures in the
construction sector are flowing through to prices faster
and to a greater extent than we expected in the December
Statement.
2000
2002
2004
2006
2008
Source: Statistics New Zealand, RBNZ estimates.
2010
0
Reflecting the government’s establishment of the
of the Emissions Trading Scheme from our projections. If
we were to add back estimates of the activity and inflation
effects of the Emissions Trading Scheme, the profile for
inflation would be slightly higher. Economic activity would
also be slightly lower. Given the Bank would look through
its first round inflationary effects, the Emissions Trading
Scheme would have a small positive impact on the interest
rate projection.
ReseRve Bank of new Zealand: Monetary Policy Statement, March 2009
33
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
2011
Mar
Jun
Sep
Dec
Mar
Jun
Sep
Dec
Mar
Jun
Sep
Dec
CPI
Quarterly
0.6
1.0
0.5
0.6
0.4
0.0
0.5
0.7
0.4
0.8
0.6
0.9
CPI
Annual
2.6
2.8
2.6
2.7
2.5
1.5
1.5
1.6
1.5
2.4
2.5
2.7
51.6
54.6
53.9
56.4
60.6
61.1
62.4
63.9
66.9
64.0
66.3
68.6
90-day
bank bill rate
5.0
5.8
5.9
5.9
5.8
5.4
5.1
5.3
5.5
5.9
6.4
6.7
Mar
0.4
2.8
69.6
6.9
Jun
Sep
Dec
Mar
Jun
Sep
Dec
Mar
Jun
Sep
Dec
Mar
Jun
Sep
Dec
First half average
Second half average
First half average
Second half average
First half average
Second half average
0.9
1.1
0.7
0.6
1.5
0.7
-0.2
0.5
1.0
0.5
1.2
0.7
1.6
1.5
-0.5
0.4
0.4
0.4
0.6
0.4
0.6
2.8
3.4
3.2
3.3
4.0
3.5
2.6
2.5
2.0
1.8
3.2
3.4
4.0
5.1
3.4
2.5
1.2
1.7
2.1
2.2
2.1
70.8
69.7
71.5
68.2
62.8
63.6
67.0
68.8
72.0
71.4
71.0
71.9
69.3
65.5
57.8
52.6
49.2
47.5
47.9
49.0
50.1
7.0
7.0
7.5
7.5
7.5
7.5
7.6
7.8
8.1
8.7
8.8
8.8
8.8
8.2
6.3
3.4
3.0
3.2
3.8
4.6
5.3
CPI
Quarterly
CPI
Annual
GDP
Quarterly
GDP
Annual average
Mar
0.7
3.4
-0.3
3.1
Jun
Sep
Dec
Mar
Jun
1.6
1.5
-0.5
0.4
0.5
4.0
5.1
3.4
3.1
1.9
-0.2
-0.4
-0.8
-0.8
2.5
1.7
0.3
-0.8
Quarterly projections
2008
2009
1
34
TWI
Notes for these tables follow on pages 37 and 38.
ReseRve Bank of new Zealand: Monetary Policy Statement, March 2009
ReseRve Bank of new Zealand: Monetary Policy Statement, March 2009
35
23.6
2.3
14.6
7.8
4.9
-0.1
4.7
7.8
7.2
5.0
4.9
4.6
Gross fixed capital formation
Market sector:
Residential
Business
Non-market government sector
Total
Final domestic expenditure
Stockbuilding1
Gross national expenditure
Exports of goods and services
Imports of goods and services
Expenditure on GDP
GDP (production)
GDP (production, March qtr to March qtr)
Percentage point contribution to the growth rate of GDP.
4.9
1.3
4.1
Final consumption expenditure
Private
Public authority
Total
1
2003
March year
(annual average percent change, unless specified otherwise)
Table B
Composition of real GDP growth
4.3
5.3
0.9
12.7
4.0
7.8
0.2
7.7
15.0
12.2
14.2
13.1
6.6
4.9
6.2
2004
3.8
2.4
4.6
12.5
3.9
6.0
0.3
6.5
2.9
12.1
5.3
9.2
5.1
4.2
4.9
2005
3.0
3.0
0.0
4.2
2.9
4.6
-0.4
4.3
-5.2
8.1
0.7
4.4
4.6
4.9
4.6
2006
Actuals
1.8
2.3
3.1
-1.6
2.8
2.1
-0.9
1.2
-2.3
0.3
-4.1
-0.6
2.8
4.0
3.1
2007
3.1
2.1
2.9
9.6
2.3
3.7
0.8
4.6
4.3
4.1
5.5
4.3
3.2
4.3
3.4
2008
-0.8
-2.2
-3.2
-1.1
-1.7
-1.6
0.5
-1.1
-22.9
-3.6
-5.6
-7.7
-0.5
3.5
0.4
2009
0.2
3.2
-1.5
-6.5
0.8
-0.5
-0.4
-1.1
-10.8
-8.0
15.5
-6.3
0.4
4.1
1.2
2010
4.8
4.6
7.1
2.8
4.8
3.5
0.0
3.5
7.5
8.8
8.9
8.6
1.5
3.8
2.0
2011
Projections
3.9
3.4
7.2
2.9
3.8
2.7
-0.2
2.5
6.5
9.6
3.3
8.4
0.5
2.4
1.0
2012
36
ReseRve Bank of new Zealand: Monetary Policy Statement, March 2009
-3.4
-5.7
-10.3
Current account balance (% of GDP)
Terms of trade (OTI measure, annual average % change)
Household saving rate (% of disposable income)
3.1
2.2
1.2
1.5
4.8
1.4
Government operating balance (% of GDP, year to June)
World economy
Trading partner GDP (annual average % change)
Trading partner CPI (TWI weighted, annual % change)
Key balances
Labour market
Total employment
Unemployment rate (March qtr, seasonally adjusted)
Trend labour productivity
4.9
3.8
1.2
5.9
56.4
Monetary conditions
90-day rate (year average)
TWI (year average)
GDP (production, annual average % change)
Potential output (annual average % change)
Output gap (% of potential GDP, year average)
2.5
2.2
-11.1
-15.5
Price measures
CPI
Labour costs
Import prices (in New Zealand dollars)
Export prices (in New Zealand dollars)
Output
2003
March year
(annual percent change, unless specified otherwise)
Summary of economic projections
Table C
3.3
1.4
-4.8
3.9
-9.7
5.2
3.1
4.1
1.3
4.3
3.7
1.7
5.3
63.6
1.5
2.1
-10.5
-5.1
2004
3.7
2.1
-6.8
5.8
-9.3
4.0
3.4
3.8
1.3
3.8
3.3
2.2
6.5
67.1
2.8
2.5
0.5
4.9
3.6
2.4
-9.2
-0.8
-11.7
6.0
2.6
3.9
1.3
3.0
2.9
2.3
7.3
70.1
3.3
3.0
6.9
3.6
2006
Actuals
2005
3.6
1.9
-8.3
1.9
-12.7
4.8
1.7
3.7
1.5
1.8
2.7
1.4
7.6
65.6
2.5
3.0
0.3
4.8
2007
4.0
3.3
-8.1
7.8
-10.6
1.3
-0.2
3.7
1.9
3.1
2.6
1.9
8.6
71.6
3.4
3.5
0.7
12.5
2008
0.5
1.1
-8.4
2.1
-7.7
-2.6
0.9
5.2
2.2
-0.8
2.6
-1.4
6.7
61.7
3.1
3.1
20.0
9.9
2009
-1.1
0.6
-8.3
-7.6
-5.3
-1.3
-1.9
6.8
2.3
0.2
2.5
-3.7
3.1
49.3
1.6
2.6
9.6
2.1
2.1
1.8
-5.8
-3.6
-4.2
-2.0
1.0
6.0
2.2
4.8
2.3
-1.3
3.8
48.0
2.2
1.6
4.4
3.2
2011
Projections
2010
3.6
2.0
-3.5
-1.0
-1.6
-2.2
2.0
5.2
2.1
3.9
2.5
-0.1
5.2
50.0
2.1
1.5
0.7
-0.3
2012
Notes to the tables
CPI
Consumer Price Index. Quarterly projections rounded to one decimal place.
TWI
RBNZ. Nominal Trade Weighted Index of the exchange rate. Defined as a
geometrically-weighted index of the New Zealand dollar bilateral exchange rates
against the currencies of Australia, Japan, the United States, the United Kingdom and
the euro area.
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. Seasonally adjusted.
World CPI inflation
Reserve Bank definition. five-country index, TWI weighted.
Import prices
Domestic currency import prices. Overseas Trade Indexes.
Export prices
Domestic currency export prices. Overseas Trade Indexes.
Terms of trade
Constructed using domestic currency export and import prices. Overseas Trade Indexes.
Private consumption
System of National Accounts.
Public authority consumption
System of National Accounts.
Residential investment
RBNZ definition. Private sector and government market sector residential
investment. System of National Accounts.
Business investment
RBNZ definition. Total investment less the sum of non-market investment and
residential investment. System of National Accounts.
Non-market investment
RBNZ definition. The System of National Accounts annual nominal government
non-market/market investment ratio is interpolated into quarterly data. This ratio
is used to split quarterly expenditure GDP government investment into market and
non-market components.
Final domestic expenditure
RBNZ definition. The sum of total consumption and total investment.
System of National Accounts.
Stockbuilding
Percentage point contribution to the growth of GDP by stocks.
System of National Accounts.
Gross national expenditure
Final domestic expenditure plus stocks. System of National Accounts.
Exports of goods and services
System of National Accounts.
Imports of goods and services
System of National Accounts.
GDP (production)
System of National Accounts.
Potential output
RBNZ definition and estimate. Refer to Conway, P and B Hunt (1997),
‘Estimating Potential Output: a semi-structural approach’, Reserve Bank of New
Zealand Discussion Paper, G97/9.
Output gap
RBNZ definition and estimate. The percentage difference between real GDP
(production, seasonally adjusted) and potential output GDP.
Current account balance
Balance of Payments.
Total employment
Household Labour Force Survey.
Unemployment rate
Household Labour Force Survey.
Household saving rate
Household Income and Outlay Account.
Reserve Bank of New Zealand: Monetary Policy Statement, March 2009
37
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.
38
Reserve Bank of New Zealand: Monetary Policy Statement, March 2009
Appendix B
Companies and organisations contacted by RBNZ staff
during the projection round
Balance Agri Nutrients Ltd
NZ Wine Association
Barfoot & Thompson Ltd
Otago Federated Farmers
Circa Marine & Industrial Ltd
Port of Tauranga Ltd
Contact Energy Ltd
Quinovic Property Management Ltd
Debtworks Ltd
Rabobank Ltd
Employers and Manufacturer’s Association (Northern)
Recruitment Consulting Services Association
Fletcher Construction Ltd
Registered Master Builders Association
Fonterra Ltd
Retailers Association
HRG New Zealand Ltd
Rio Tinto Alcan Ltd
Landcorp Farming Ltd
Silver Fern Farms Ltd
Mainfreight Ltd
Skope Industries Ltd
Mainzeal Construction Ltd
Smith City Group Ltd
Meridian Energy Ltd
Snowy Peak Ltd
Ministry of Tourism
Tait Electronics Ltd
Nelson Pine Industries Ltd
The Warehouse Group Ltd
New Zealand Council of Trade Unions
Yarrow (The Bakers) Ltd
Noel Leeming Ltd
NZ Oil and Gas Limited
Reserve Bank of New Zealand: Monetary Policy Statement, March 2009
39
Appendix C
Reserve Bank statements on monetary policy
OCR reduced to 5.0 percent
Amended Policy Targets Agreement Signed
4 December 2008
19 December 2008
The Reserve Bank today reduced the Official Cash Rate
Hon Bill English
(OCR) from 6.5 percent to 5.0 percent.
Minister of Finance
Reserve Bank Governor Alan Bollard commented
A new Policy Targets Agreement signed by Finance Minister
that “ongoing financial market turmoil and the marked
Bill English and Reserve Bank Governor Alan Bollard has
deterioration in the outlook for global growth have played a
been released today.
large role in shaping today’s decision. Activity in most of our
The only change to the Policy Targets Agreement is a
trading partners is now expected to contract or grow only
statement of the government’s economic objectives, as a
very slowly over the next few quarters.
backdrop for the operation of monetary policy. The statement
“Economic activity in New Zealand will be further
is as follows: “The government’s economic objective is to
constrained as a result, compared with our view in October.
promote a growing, open and competitive economy as the
“Inflation is abating here and overseas as a consequence
best means of delivering permanently higher incomes and
of these developments. We now have more confidence that
living standards for New Zealanders. Price stability plays an
annual inflation will return comfortably inside the target
important part in supporting this objective”.
band of 1 to 3 percent some time in the first half of 2009 and
The Finance Minister and Reserve Bank Governor agree
remain there over the medium term. However, we still have
that the monetary policy framework and the main features
concerns that domestically generated inflation (particularly
of the Policy Targets Agreement continue to provide the
local body rates and electricity prices) is remaining stubbornly
best basis for monetary policy to contribute to the economy
high.
returning to a sustainable, stronger growth path over time,
“Today’s decision brings the cumulative reduction in the
OCR since July to 3.25 percent, and takes monetary policy to
notwithstanding the current very difficult international
environment.
an expansionary position. Given recent developments in the
The Policy Targets Agreement is available on the Reserve
global economy, the balance of risks to activity and inflation
Bank of New Zealand website: http://www.rbnz.govt.nz/
are to the downside. Thus it is appropriate to deliver this
monpol/pta/index.html
reduction quickly to support the economy and keep inflation
from falling below the target band.
“Monetary policy is working together with the
depreciation of the New Zealand dollar and the fiscal
stimulus now in train, to provide substantial support to
demand over the period ahead and to create the conditions
for some rebound in growth as global conditions improve.
“To ensure the response we are seeking, we expect
financial institutions to play their part in the economic
adjustment process by passing on lower wholesale interest
rates to their customers.
“Further movements in the OCR will be assessed
against emerging developments in the global and domestic
economies and the response to policy changes already in
place.”
40
OCR reduced to 3.5 percent
29 January 2009
The Reserve Bank today reduced the Official Cash Rate
(OCR) from 5.0 percent to 3.5 percent.
Reserve Bank Governor Alan Bollard commented that
“the news coming from our trading partners is very negative.
The global economy is now in recession and the outlook for
international growth has been marked down considerably
since our December Monetary Policy Statement.
“Globally, there has been considerable policy stimulus
put in place and we expect this to help bring about a
recovery in growth over time. However, there remains huge
uncertainty about the timing and strength of a recovery.
Reserve Bank of New Zealand: Monetary Policy Statement, March 2009
“The extent of the decline in global growth prospects
interest rates will have a positive impact on growth, alongside
and the ongoing uncertainty has played a large part in today’s
a lower exchange rate and fiscal stimulus, provided firms and
decision. We now expect the impact on New Zealand of
households do not unnecessarily contract their spending.
these developments to be greater than we did in December,
“To ensure the response we are seeking, we expect
as a result of a more negative outlook for the terms of trade
financial institutions to play their part in the economic
and exports, and tighter credit conditions.
adjustment process by passing on lower wholesale interest
“Inflation pressures are abating. We have confidence
that annual inflation will be comfortably inside the target
band of 1 to 3 percent over the medium term.
rates to their customers. This will help New Zealand respond
flexibly.
“Further movements in the OCR will be assessed
“Given this backdrop it is appropriate to take the OCR
against emerging developments in the global and domestic
to a more stimulatory position and to deliver this reduction
economies and the response to policy changes already in
quickly.
place. We would expect any further reductions to be smaller
“Today’s decision brings the cumulative reduction in
than those seen recently.”
the OCR since July 2008 to 4.75 percentage points. Lower
Reserve Bank of New Zealand: Monetary Policy Statement, March 2009
41
Appendix D
The Official Cash Rate chronology
Date
OCR
(percent)
Date
OCR
(percent)
Date
OCR
(percent)
17 March 1999
4.50
4 September 2003
5.00
24 April 2008
8.25
21 April 1999
4.50
23 October 2003
5.00
5 June 2008
8.25
19 May 1999
4.50
4 December 2003
5.00
24 July 2008
8.00
30 June 1999
4.50
29 January 2004
5.25
11 September 2008
7.50
18 August 1999
4.50
11 March 2004
5.25
23 October 2008
6.50
29 September 1999
4.50
29 April 2004
5.50
4 December 2008
5.00
17 November 1999
5.00
10 June 2004
5.75
29 January 2009
3.50
19 January 2000
5.25
29 July 2004
6.00
15 March 2000
5.75
9 September 2004
6.25
19 April 2000
6.00
28 October 2004
6.50
17 May 2000
6.50
9 December 2004
6.50
5 July 2000
6.50
27 January 2005
6.50
16 August 2000
6.50
10 March 2005
6.75
4 October 2000
6.50
28 April 2005
6.75
6 December 2000
6.50
9 June 2005
6.75
24 January 2001
6.50
28 July 2005
6.75
14 March 2001
6.25
15 September 2005
6.75
19 April 2001
6.00
27 October 2005
7.00
16 May 2001
5.75
8 December 2005
7.25
4 July 2001
5.75
26 January 2006
7.25
15 August 2001
5.75
9 March 2006
7.25
19 September 2001
5.25
27 April 2006
7.25
3 October 2001
5.25
8 June 2006
7.25
14 November 2001
4.75
27 July 2006
7.25
23 January 2002
4.75
14 September 2006
7.25
20 March 2002
5.00
26 October 2006
7.25
17 April 2002
5.25
7 December 2006
7.25
15 May 2002
5.50
25 January 2007
7.25
3 July 2002
5.75
8 March 2007
7.50
14 August 2002
5.75
26 April 2007
7.75
2 October 2002
5.75
7 June 2007
8.00
20 November 2002
5.75
26 July 2007
8.25
23 January 2003
5.75
13 September 2007
8.25
6 March 2003
5.75
25 October 2007
8.25
24 April 2003
5.50
6 December 2007
8.25
5 June 2003
5.25
24 January 2008
8.25
24 July 2003
5.00
6 March 2008
8.25
42
ReseRve Bank of new Zealand: Monetary Policy Statement, March 2009
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 2009:
2009
30 April
OCR announcement
11 June
Monetary Policy Statement
30 July
OCR announcement
10 September
Monetary Policy Statement
29 October
OCR announcement
10 December
Monetary Policy Statement
The announcement will be made at 9:00 am on the day concerned. Please note that the Reserve Bank reserves the right
to make changes, if required due to unexpected developments. In that unlikely event, the markets and the media would be
given as much warning as possible.
Reserve Bank of New Zealand: Monetary Policy Statement, March 2009
43
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 Government’s economic objective is to promote a growing, open and competitive economy as the best means of
delivering permanently higher incomes and living standards for New Zealanders. Price stability plays an important part in
supporting this objective.
2 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 per cent
and 3 per cent 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.
44
Reserve Bank of New Zealand: Monetary Policy Statement, March 2009
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.
ReseRve Bank of new Zealand: Monetary Policy Statement, March 2009
45
46
ReseRve Bank of new Zealand: Monetary Policy Statement, March 2009
48
ReseRve Bank of new Zealand: Monetary Policy Statement, March 2009