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-ONETARY0OLICY3TATEMENT
$ECEMBER
4HIS3TATEMENTISMADEPURSUANTTO3ECTIONOFTHE2ESERVE"ANKOF.EW:EALAND!CT
#ONTENTS
0OLICYASSESSMENT
/VERVIEWANDKEYPOLICYJUDGEMENTS
4HECURRENTECONOMICSITUATION
4HEMACROECONOMICOUTLOOK
3UMMARYTABLES
#HRONOLOGY
#OMPANIESANDORGANISATIONSCONTACTEDDURINGTHEPROJECTIONROUND
2ESERVE"ANKSTATEMENTSONMONETARYPOLICY
4HE/FlCIAL#ASH2ATECHRONOLOGY
5PCOMING2ESERVE"ANK-ONETARY0OLICY3TATEMENTAND/FlCIAL#ASH2ATERELEASEDATES
0OLICY4ARGETS!GREEMENT
!PPENDICES
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ANDPERCENTONAVERAGEOVERTHEMEDIUMTERM4HISOUTLOOKASSUMESTHATSIGNIlCANTPIPELINEEFFECTSFROMPASTINTEREST
ANDEXCHANGERATEINCREASESWILLEVENTUATEANDACTTOFURTHERCONSTRAINTHEECONOMYOVERTHEPERIODAHEAD
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UPWARDSOUR'$0ESTIMATESFORTHESECONDHALFOFANDPUSHEDOUTOUREXPECTEDTIMINGOFTHEECONOMICSLOWDOWN"UT
THESLOWDOWNISSTILLEXPECTEDIN4HEEASINGINHOUSESALESRESIDENTIALBUILDINGCONSENTSANDNETIMMIGRATIONREMAIN
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THECONSTRAININGEFFECTSOFTHESTRONG.:DOLLAR
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TWOSIDED/NTHEUPSIDETHEREISCLEARLYARISKTHATTHECURRENTMOMENTUMINHOUSEHOLDDEMANDWILLHOLDUPLONGERTHAN
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TIGHTENINGCANNOTBERULEDOUT&URTHERTHECURRENTOUTLOOKOFFERSLITTLESCOPEFORANEASINGINPOLICYINTHEFORESEEABLE
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RANGEOFINmUENCES
INDICATE STRENGTH IN ACTIVITY OVER AND OUR UPDATED
s 4HEHIGHEXCHANGERATEHASEXPOSEDDOMESTICOPERATORS
PROJECTIONS INCORPORATE A SLIGHTLY STRONGER CYCLICAL STARTING
TOAGREATERDEGREEOFIMPORTCOMPETITIONANDADVERSELY
POINT (OWEVER AT THIS JUNCTURE MONETARY POLICY IS ON
AFFECTEDEXPORTREVENUES
HOLD 4HE FULL EFFECTS OF RECENT POLICY TIGHTENINGS AND THE
s 4HE OUTLOOK FOR EXPORT DEMAND HAS WEAKENED SINCE
HIGH EXCHANGE RATE ARE STILL TO WORK THEIR WAY THROUGH
3EPTEMBER #ONSENSUS FORECASTS FOR TRADING PARTNER
THE ECONOMY &URTHER WE CONSIDER THAT THE TURNING POINT
GROWTH OVER HAVE BEEN REVISED LOWER REmECTING
IN THE BUSINESS CYCLE IS NEAR 7E BELIEVE THESE FACTORS WILL
CONCERNS OVER HIGH OIL PRICES 4HE 53 DOLLAR HAS ALSO
BE SUFlCIENT TO CONTAIN MEDIUMTERM INmATION PRESSURES
WEAKENEDASCONCERNSMOUNTOVERSTRUCTURALIMBALANCES
(OWEVER IF ECONOMIC ACTIVITY CONTINUES TO SURPRISE ON THE
INTHE53ECONOMY
UPSIDE A FURTHER POLICY TIGHTENING CANNOT BE RULED OUT
s 4O DATE HIGH WORLD COMMODITY PRICES HAVE PROVIDED
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THAN EXPECTED AND RECENT DATA SUGGEST BUOYANT ACTIVITY
FOR THE REMAINDER OF 3TRONG RETAIL SALES THROUGH
THE 3EPTEMBER QUARTER SUGGEST THAT HOUSEHOLD SPENDING
GROWTHREMAINSROBUSTCONSISTENTWITHTHECONlDENTMOOD
OF CONSUMERS lGURE #ONSUMER CONlDENCE CONTINUES
!5$EXCHANGERATERETRACINGFROMITS3EPTEMBERPEAK
s ! SUSTAINED PERIOD OF STRONG DEMAND HAS STRETCHED
lRMSPRODUCTIVECAPACITYWITHCAPACITYUTILISATIONRISING
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$ESPITE THESE INmUENCES BUSINESSES HAVE REMAINED
RELATIVELYUPBEATONTHEIROWNACTIVITYOUTLOOKlGURE
TOBEUNDERPINNEDBYRECENTINCREASESINHOUSEHOLDWEALTH
A STRONG LABOUR MARKET AND HIGH COMMODITY PRICES
&URTHERTHESTRONGEXCHANGERATEHASIMPROVEDTHERELATIVE
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PRICEOFIMPORTEDGOODSANDSERVICES
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#ONSUMERCONlDENCEANDDOMESTICTRADING
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.OTWITHSTANDING THE OBSERVED STRENGTH IN ACTIVITY
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TOSELLAHOUSEHASINCREASED-ONTHLYNETIMMIGRATIONHAS
ANNUALAVERAGEPERCENTAGECHANGE
BEEN CONSISTENTLY LOWER THAN THE LARGE INmOWS OBSERVED
OVER THE PAST COUPLE OF YEARS 4HESE INmUENCES WERE THE
KEYDRIVERSOFSTRONGDOMESTICACTIVITYANDTHEYWILLALSOBE
THEKEYFACTORSTHATMODERATEECONOMICACTIVITYNEXTYEAR
)N ADDITION WE EXPECT A FURTHER BRAKING EFFECT ON EXPORT
ACTIVITYOVERTHECOMINGMONTHSFROMTHEHIGH.EW:EALAND
DOLLARlGURE
'IVENPRESSURESONTHEECONOMYSPRODUCTIVERESOURCES
MEDIUMTERM INmATION PRESSURES ARE PROJECTED TO REMAIN
STRONG!TTHISSTAGEHOWEVERWEBELIEVETHATTHEPOLICY
3OURCE3TATISTICS.EW:EALAND
TIGHTENINGTODATEWILLBESUFlCIENTTOENSURETHAT#0)INmATION
REMAINSCONSISTENTWITHTHE0OLICY4ARGETS!GREEMENT04!
ASSUMPTIONTHATTHEEXCHANGERATEISNEARITSPEAK4HESE
)NmATION IN THE NONTRADABLES SECTOR IS CURRENTLY HIGH BUT
INmUENCESTAKENTOGETHERSUGGESTTHATOVERALL#0)INmATION
EXPECTEDTOEASEASECONOMICACTIVITYSLOWS)NmATIONINTHE
SHOULD RISE NEXT YEAR TO AROUND PER CENT BEFORE EASING
TRADABLESSECTORISLOWBUTISEXPECTEDTORISEBASEDONOUR
TOWARDSTHEENDOFTHEPROJECTIONPERIODlGURE
"OX
2EVIEWOFRECENTMONETARYPOLICY
DECISIONS
WEINCREASEDTHE/#2BYBASISPOINTSANDSIGNALLED
THATFURTHERTIGHTENINGWASLIKELYTOBENECESSARY
!T OUR INTERIM REVIEW IN /CTOBER WE INCREASED THE
%ARLY LAST YEAR WE PROJECTED THE ECONOMY TO SLOW DUE
/#2BYBASISPOINTS(OWEVERWENOTEDTHATRECENT
TO THE STRONG APPRECIATION OF THE CURRENCY DROUGHT IN
MONETARYPOLICYTIGHTENINGSANDTHEHIGHEXCHANGERATE
SOMEAREASOFTHECOUNTRYANDELECTRICITYSHORTAGES4HIS
WOULD TAKE SOME TIME TO WORK THEIR WAY THROUGH THE
PROJECTED SLOWDOWN WAS EXPECTED TO REDUCE INmATION
ECONOMY7ECONSIDEREDTHATTHEFULLEFFECTOFCURRENT
PRESSURES (ENCE BETWEEN !PRIL AND *ULY THE
POLICY SETTINGS WOULD BE SUFlCIENT TO ENSURE PRICE
/FlCIAL#ASH2ATE/#2WASREDUCEDFROMPERCENT
STABILITYASDElNEDINTHE2ESERVE"ANKS04!
TOPERCENT
)N THE LATTER PART OF ECONOMIC ACTIVITY WAS
PROVINGTOBEMOREROBUSTTHANEXPECTED3TRONGDOMESTIC
&IGURE
/FlCIALCASHRATE
ACTIVITY PARTICULARLY IN THE HOUSING AND CONSTRUCTION
SECTORSWASPLACINGPRESSUREONRESOURCESANDADDINGTO
INmATIONPRESSURES!SARESULTITWASVIEWEDASPRUDENT
TOMOVEMONETARYPOLICYTOLESSSTIMULATORYLEVELSAND
BETWEEN*ANUARYAND*ULYTHE/#2WASGRADUALLY
INCREASEDFROMPERCENTTOPERCENT
!TTHETIMEOFOUR3EPTEMBER3TATEMENTECONOMIC
ACTIVITY AND INmATION PRESSURES HAD REMAINED STRONG
7HILE THE RISE OF THE .EW :EALAND DOLLAR HAD LIMITED
IMPORTPRICEINmATIONRESOURCESWERESTILLSTRETCHEDAND
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3OURCE2".:
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4RADABLESANDNONTRADABLESINmATION
THESEPRESSURESMAYCONTINUETOBUILDORREMAINPERSISTENT
ANNUALRATE
EVEN AFTER ACTIVITY EVENTUALLY SLOWS (OWEVER RESPONDING
TOOAGGRESSIVELYATTHEPEAKOFTHECYCLEMAYEXACERBATETHE
EVENTUALSLOWDOWNINACTIVITY
4O DATE THE ADJUSTMENT OF PRICES AND WAGES TO THE
STRESSESONLABOURANDCAPITALRESOURCESHASBEENRELATIVELY
CONTAINED4HISLARGELYREmECTSANECONOMICENVIRONMENTTHAT
HASENJOYEDPRICESTABILITYOVERTHEPASTDECADEANDPROVIDES
SOME DEGREE OF CONlDENCE THAT INmATION EXPECTATIONS WILL
REMAINSETTLEDTHROUGHTHECYCLE
7HILE THE /#2 REMAINS UNCHANGED ACTUAL MONETARY
3OURCE3TATISTICS.EW:EALAND2".:ESTIMATES
/URCENTRALPROJECTIONSHOWSINmATIONNEARTHETOPOFTHE
TARGETRANGEPROVIDINGPOLICYWITHLIMITEDHEADROOM7ERE
INmATION PRESSURES TO PROVE STRONGER THAN OUR PROJECTIONS
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TIGHTENING CANNOT BE RULED OUT #ERTAINLY THE OUTLOOK
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lXED RATE MORTGAGES AND THE EXAGGERATED COMPETITIVE
PRESSURESINTHISSEGMENTOFTHEHOMEMORTGAGEMARKET
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AND RETAIL RATES ARE SUSTAINABLE 7E THEREFORE EXPECT THAT
0OLICYJUDGEMENTS
EFFECTIVEMORTGAGERATESWILLRISEOVERTHENEXTYEARASMARGINS
)N ACHIEVING PRICE STABILITY WE SEEK TO AVOID UNNECESSARY
MOVEUPSEEBOX)NCREASESINWORLDLONGTERMINTEREST
INSTABILITY IN OUTPUT INTEREST RATES AND THE EXCHANGE RATE
RATES ARE EXPECTED TO REINFORCE THIS TREND 0IPELINE EFFECTS
4HISREQUIRESAMOREDELICATEBALANCINGACTAROUNDTURNING
FROMTHEEXCHANGERATEAREALSOPRESENTINTHEECONOMYAND
POINTSINTHECYCLEASTHISISWHENTHEPOLICYRISKSAREARGUABLY
SHOULDFEEDTHROUGHASCURRENCYHEDGESROLLOFF
"OX
BETWEENTWOYEARMORTGAGEANDWHOLESALEINTERESTRATES
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ISCURRENTLYATITSLOWESTLEVELINOVERlVEYEARS
THEMORTGAGEMARKET
&IGURE
4HERESPONSEOFMORTGAGERATESTOINCREASESINTHE/#2
-ARGINSBETWEENWHOLESALEINTERESTRATESAND
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MORTGAGERATES
PREVIOUSTWOMONETARYPOLICYCYCLES &ORMUCHOF
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!MORERECENTDEVELOPMENTHASBEENSTRONGCOMPETITION
AMONGSTTHEMAJOR.EW:EALANDBANKSINTHEHOMELENDING
MARKETPARTICULARLYINTWOYEARlXEDRATEMORTGAGES4HIS
CAN BE SEEN IN lGURE WHICH SHOWS THAT THE MARGIN
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DISCUSSIONOFMONETARYPOLICYANDMORTGAGEINTERESTRATES
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LATECOMPAREDWITHANINCREASEOFBASISPOINTSIN
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ON THE WHOLESALE YIELD CURVE IS STILL WORKING ITS WAY
THROUGHTHEPIPELINETORETAILINTERESTRATES)TISIMPOSSIBLE
TOFORECASTWITHPRECISIONWHENANDHOWQUICKLYEFFECTIVE
RETAILRATESWILLRISEBUTONTHEBASISOFSOMEASSUMPTIONS
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3OURCE2".:
THERE IS LITTLE MOVEMENT IN mOATING MORTGAGE RATES
RATESINCREASEBUTBYLESSTHAN#ONSENSUS&ORECASTS&ROM
FROMTHEIRCURRENTLEVELS
s BORROWERS CONTINUE TO GRAVITATE TOWARDS THE LOWEST
CURRENTLEVELSTHEEFFECTIVERATEWOULDINCREASEBYAROUND
MORTGAGE RATES ON OFFER WITH NEW BORROWING
BASISPOINTSBY-ARCHANDBYATOTALOFBASIS
CONCENTRATED IN ONE AND TWOYEAR lXED TERM
POINTS BY -ARCH 5NDER THESE CIRCUMSTANCES THE
MORTGAGES
LOWESTMORTGAGERATEAVAILABLEINTHEMARKETWOULDDRIFT
s IN LINE WITH TRENDS OVER THE PAST SIX MONTHS MILLION PER MONTH OF EXISTING MORTGAGES MOVE FROM
UPTOBETWEENANDPERCENTBYTHEENDOF
!LTERNATIVELYIFlXEDMARGINSRECOVERMOSTOFTHEIRLOST
GROUND AND GLOBAL INTEREST RATES RISE TO A GREATER EXTENT
mOATINGRATESTOONEANDTWOYEARlXEDRATES
s GLOBALINTERESTRATESCONTINUETORISEOVERTHENEXT
THAN #ONSENSUS &ORECASTS CURRENTLY ANTICIPATE IT IS LIKELY
TOMONTHSINLINEWITH#ONSENSUS&ORECASTSWHICH
THATMORTGAGERATESWILLFOLLOWAPATHCLOSERTOOURHIGH
HAVE 53 YEAR BOND YIELDS INCREASING FROM AROUND
SCENARIO&ROMCURRENTLEVELSTHEEFFECTIVEMORTGAGERATE
PERCENTCURRENTLYTOPERCENTBY$ECEMBER
WOULD MOVE UP BY BASIS POINTS BY -ARCH AND
THE EXTENT TO WHICH THIS OCCURS WILL HAVE A CRUCIAL
A TOTAL OF BASIS POINTS BY -ARCH 4HE LOWEST
IMPACT ON LOCAL WHOLESALE INTEREST RATES AND HENCE
MORTGAGERATEAVAILABLEINTHEMARKETWOULDRISETOWARD
THEFUNDINGCOSTSFORlXEDMORTGAGES
PERCENTBYTHEENDOF
s MARGINSONTWOYEARlXEDRATELENDINGRETURNTOMORE
NORMALLEVELSWITHINTHENEXTFEWMONTHS
/UR TWO SCENARIOS ARE SHOWN IN lGURE 4O SOME
EXTENT REGARDLESS OF lXED RATE MOVEMENTS THE EFFECTIVE
MORTGAGE RATE IS LIKELY TO MOVE UP BY AROUND BASIS
POINTSBYEARLY4HISREmECTSLAGSINTHEFULLEFFECTOF
CURRENT ADVERTISED RATES FEEDING THROUGH TO mOATING RATE
MORTGAGES AND TO EXISTING lXEDRATE MORTGAGES AS THEY
RUNOFF
/UR LOW SCENARIO EMBODIES THE PRESUMPTIONS THAT
BANKSlXEDRATEMARGINSONLYRECOVERTO@BREAKEVENLEVELS
THOUGHTTOBEAROUNDBASISPOINTSANDGLOBALINTEREST
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4HERE REMAIN BOTH UPSIDE AND DOWNSIDE RISKS TO THE
ECONOMIC ACTIVITY AS HOUSEHOLD CONlDENCE REMAINS
ECONOMIC OUTLOOK 4HE DOWNSIDE RISKS REMAIN WEIGHTED
SUPPORTED BY STRONG EMPLOYMENT PROSPECTS AND PAST
TOWARDS THE EXTERNAL SECTOR 'LOBAL DEMAND COULD SLOW
IMPROVEMENTSTOWEALTH)NTHESECIRCUMSTANCESINmATION
BYMOREPARTICULARLYIFCONCERNSOVERIMBALANCESINTHE53
WOULDLIKELYBEHIGHERANDCOULDSPARKUNHELPFULCHANGESTO
ECONOMYLEADTOHIGHERLONGTERMINTERESTRATESINTHE53
PRICEANDWAGESETTINGBEHAVIOUR
7EAKERGLOBALDEMANDCOULDIMPACTONEXPORTVOLUMESAND
'IVEN THE LIMITED INmATION HEADROOM THAT WE HAVE A
COULDHAVEAMOREIMMEDIATEADVERSEEFFECTONCOMMODITY
FURTHER TIGHTENING IN POLICY CANNOT BE RULED OUT "UT FOR
PRICES
NOW WE ANTICIPATE THE DEGREE OF POLICY TIGHTNESS IN THE
4HEUPSIDERISKSREMAINFOCUSSEDONDOMESTICDEMAND
PIPELINE WILL BE SUFlCIENT TO ENSURE THAT INmATION REMAINS
'ROWTH IN CONSUMER SPENDING MAY CONTINUE TO SUSTAIN
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DAYINTERESTRATES
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4HE.EW:EALANDECONOMYGREWBYPERCENTINTHEYEAR
&IGURE
TO*UNEWITHSIGNIlCANTGROWTHINCONSUMPTIONRESIDENTIAL
%XCHANGERATESAGAINSTTHE53DOLLAR
INVESTMENT AND BUSINESS INVESTMENT 4HE ECONOMY IS NOW
PERCENTAGECHANGESINCETHE3EPTEMBER
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3TATEMENT
3TATEMENT2ECENTDATAHASONBALANCECOMEOUTSTRONGER
-EXICANPESO
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! SUSTAINED PERIOD OF STRONG GROWTH HAS RESULTED
3WEDISHKRONA
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TRADABLES SECTOR PARTICULARLY IN THE CONSTRUCTION SECTOR
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PRICESINTHETRADABLESSECTOR/VERALL#0)INmATIONHASBEEN
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TRADABLESINmATION
3OUTH!FRICANRAND
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3OURCE2".:
RATE INCREASES WILL BECOME MORE CONTINGENT ON ECONOMIC
DATA
2ECENT DATA HAVE BEEN WEAK IN *APAN WITH '$0 ONLY
GROWING PER CENT IN THE 3EPTEMBER QUARTER -ARKETS
ARE NOW QUESTIONING WHETHER *APANESE GROWTH PEAKED
EARLIER IN THE YEAR #ONVERSELY MOMENTUM IN THE #HINESE
ECONOMYHASREMAINEDSTRONG4HE0EOPLES"ANKOF#HINA
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SECOND HALF OF LAST YEAR HAS EASED /VER THE COMING #ONTINUEDWEAKNESSINDOMESTICDEMANDANDASLOWDOWN
MONTHS THE ECONOMIES OF OUR MAIN TRADING PARTNERS ARE
IN THE PACE OF EXPORT GROWTH HAVE RAISED CONCERNS THAT
EXPECTEDTOGROWATCLOSETOTREND
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RECOVERY CONTINUES TO LOOK FRAGILE WITH THE OUTLOOK
THE POTENTIAL REALIGNMENT IN CURRENCIES ARISING OUT OF THE
CHARACTERISED BY CONTINUING UNCERTAINTY PARTICULARLY THAT
53 SAVINGSINVESTMENT IMBALANCE &UTURE DEVELOPMENTS
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53$EXCHANGERATE
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DEVELOPMENTSINTHE53
)N THE 53 A RUN OF UPSIDE SURPRISES IN ECONOMIC DATA
LEAVE INTEREST RATES UNCHANGED IN THE FORESEEABLE FUTURE
AND A FALL IN CRUDE OIL PRICES HAS RAISED CAUTIOUS OPTIMISM
'ROWTH IN THE 5+ APPEARS TO BE LOSING SOME MOMENTUM
ABOUTTHE53ECONOMICRECOVERY4HE&EDERAL2ESERVE&ED
ASINDUSTRIALPRODUCTIONANDTHEHOUSINGMARKETCOOL4HE
INCREASED ITS POLICY RATE TO PER CENT IN .OVEMBER AND
"/%ISEXPECTINGGROWTHTOREMAINCLOSETOTRENDBUTTHE
REITERATED THAT ITS ACCOMMODATIVE POLICY SETTINGS WILL BE
RISKSARESKEWEDTOTHEDOWNSIDEPARTICULARLYINRELATIONTO
REMOVEDATAMEASUREDPACE&EDOFlCIALSHAVESUGGESTED
OIL PRICES INTERNATIONAL IMBALANCES AND HOUSING MARKET
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5RIDASHIAND%UROKIWIBOND
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4HE.EW:EALANDDOLLARHASBEENSUPPORTEDTHISYEARBY
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!LTHOUGHSOMEINDUSTRIESHAVEBEENUNDERPRESSURETO
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/UR VIEW ON THE OUTLOOK FOR .EW :EALANDS MAIN TRADING
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FUTUREDIRECTIONOFIMPORTPRICESREMAINSASIGNIlCANTSOURCE
OFUNCERTAINTY
4HE PROJECTED DEPRECIATION OF THE EXCHANGE RATE
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3OURCE#ONSENSUS%CONOMICS)NC2".:ESTIMATES
YEARS OF THE PROJECTION IMPLYING THAT IMPORTS WILL TEND TO
BECOME MORE EXPENSIVE RELATIVE TO DOMESTIC GOODS AND
7ORLD INmATION IS EXPECTED TO INCREASE A LITTLE IN THE
SERVICES
COMINGYEAR(OWEVERTHISISLIKELYTOBETEMPORARYMOSTLY
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(IGH OIL PRICES PRESENT AN ONGOING RISK TO THE WORLD
GROWTHOUTLOOK!TPRESENTWEHAVEADOPTEDTHE#ONSENSUS
ASSUMPTION THAT OIL PRICES WILL GRADUALLY MODERATE FROM
THEIR CURRENT HIGHS TOWARD THEIR LONGRUN AVERAGE )F OIL
PRICES REMAIN HIGHER FOR LONGER THEN GLOBAL GROWTH WOULD
MODERATEANDGLOBALINmATIONWOULDINCREASEWITHKNOCK
4ERMSOFTRADE
3TRONG GAINS IN WORLD EXPORT PRICES HAVE DRIVEN .EW
:EALANDS GOODS AND SERVICES TERMS OF TRADE TO HIGH LEVELS
RECENTLY4HETERMSOFTRADEHAVECONTINUEDTOIMPROVESINCE
THE3EPTEMBER3TATEMENT4HETERMSOFTRADEAREEXPECTED
TOFALLNEXTYEARASEXPORTPRICESFALLMORESHARPLYTHANIMPORT
PRICESlGURE
ONEFFECTSFOR.EW:EALAND
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&IGURE
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CORRECTIONINTHESEIMBALANCESCOULDSLOWTHEPACEOFTHE53
ECONOMICRECOVERYWITHPOTENTIALFORSHARPADJUSTMENTSTO
WORLDWIDEINTERESTRATESANDEXCHANGERATES
4HETRADABLESSECTOR
%XPORTPRICES
7ORLD PRICES OF .EW :EALANDS EXPORTS HAVE RISEN VERY
STRONGLYOVERTHEPASTYEARMAINLYDUETOSTRONGINTERNATIONAL
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3OURCE3TATISTICS.EW:EALAND2".:ESTIMATES
OF OUR KEY COMMODITY EXPORTS )NDICATIONS ARE THAT THESE
FACTORS WILL REMAIN IN PLACE FOR SOME MONTHS CONTINUING
TOSUPPORTWORLDEXPORTPRICES&URTHERAHEADWEEXPECTA
%XCHANGERATE
GRADUALMODERATIONINWORLDEXPORTPRICESASINTERNATIONAL
4HEEXCHANGERATEHASRISENINRECENTMONTHSLEAVINGTHE
SUPPLY OF SOME PRIMARY PRODUCTS INCREASES (OWEVER THE
47)AROUNDPERCENTHIGHERTHANTHELEVELASSUMEDINTHE
PROJECTEDIMPACTOFTHISFALLINWORLDEXPORTPRICESISMORE
3EPTEMBER3TATEMENT/URTECHNICALASSUMPTIONISFORTHE
THAN OFFSET BY AN ASSUMED DEPRECIATION IN THE EXCHANGE
TRADEWEIGHTEDEXCHANGERATETOREMAINAROUNDITSCURRENT
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LEVELFORSOMEMONTHSYETBEFOREGRADUALLYREVERTINGTOWARDS
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ANDINTERESTRATEDIFFERENTIALSHAVEINmUENCEDMOVEMENTSIN
PERCENTOFTRENDOUTPUT
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FORTHE47)ISCONSISTENTWITHFALLINGWORLDEXPORTPRICESAND
A NARROWING IN THE INTEREST RATE DIFFERENTIAL BETWEEN .EW
:EALANDANDTHERESTOFTHEWORLD
&IGURE
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3OURCE3TATISTICS.EW:EALAND2".:ESTIMATES
)MPORTVOLUMES
4HEPASTYEARHASSEENASIGNIlCANTINCREASEINTHEGROWTH
OF IMPORT VOLUMES REmECTING CONTINUED STRENGTH IN THE
DOMESTIC ECONOMY )N ADDITION THE HIGH EXCHANGE RATE
3OURCE2".:ESTIMATES
HAS SEEN CONSUMERS AND BUSINESSES ALIKE TAKE ADVANTAGE
OFTHEHIGHERPURCHASINGPOWEROFTHE.EW:EALANDDOLLAR
7E PROJECT THAT IMPORTS OF CAPITAL GOODS WILL CONTINUE
%XPORTVOLUMES
%XPORT VOLUMES HAVE BEEN STRONG IN RECENT YEARS BUT WE
EXPECTTHELAGGEDEFFECTOFTHEHIGHEXCHANGERATETOHAVE
AN IMPACT ON EXPORTS IN /VERALL EXPORT VOLUMES
ARE EXPECTED TO UNDERPERFORM '$0 GROWTH ALTHOUGH THE
TO UNDERPIN STRONG IMPORT VOLUMES AS lRMS CONTINUE TO
INVESTINLABOURSAVINGCAPITALANDEXPANDTHEIRPRODUCTIVE
CAPACITY&URTHERAHEADIMPORTVOLUMEGROWTHISPROJECTED
TOMODERATEASTHEPACEOFTHEDOMESTICECONOMYSLOWSAND
THE EXPECTED DEPRECIATION OF THE EXCHANGE RATE RAISES THE
OUTLOOKVARIESBYSECTOR
s 7HILENONPRIMARYMANUFACTURINGHASEXPERIENCEDVERY
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&IGURE
nSHOULDBEFELTNEXTYEAR!NNUALGROWTHISEXPECTEDTO
)MPORTVOLUMES
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PERCENTOFTRENDOUTPUT
s !GRICULTURALEXPORTSAREPROJECTEDTOGROWATAROUND
PERCENTPERANNUMTHROUGHOUTTHEPROJECTIONPERIOD
s ,OGEXPORTSAREPROJECTEDTOREMAINWEAK0OORRETURNS
RESULTINGFROMLOWWORLDPRICESTHEHIGHEXCHANGERATE
AND HIGH SHIPPING COSTS WILL CONTINUE TO DISCOURAGE
FORESTOWNERSFROMFELLING
s %XPORTS OF SERVICES ALTHOUGH CURRENTLY STRONG ARE
EXPECTED TO WEAKEN DUE TO THE LAGGED EFFECTS OF THE
HIGH.EW:EALANDDOLLAR
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2%3%26%"!.+/&.%7:%!,!.$-ONETARY0OLICY3TATEMENT$ECEMBER
#URRENTACCOUNTBALANCE
0OPULATIONANDHOUSING
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4HEVERYSTRONGHOUSEPRICEINmATIONCYCLENOWAPPEARSTOBE
EXPORTSFORSOMETIME)NLINEWITHTHEPROJECTEDFALLINTHE
PASTITSPEAKPARTLYASARESULTOFSLOWINGNETIMMIGRATION
TERMS OF TRADE THE CURRENT ACCOUNT DElCIT IS PROJECTED TO
WHICH WE EXPECT WILL CONTINUE TO FALL BEFORE STABILISING
EXPAND TO A PEAK OF AROUND PER CENT OF '$0 IN LATE
A LITTLE BELOW ITS AVERAGE LEVEL FOR THE PAST DECADE lGURE
7ITH LOWER NET IMMIGRATION AND INCREASING EFFECTIVE
MORTGAGE RATES WE PROJECT THAT HOUSE PRICE INmATION WILL
(OUSEHOLDSPENDING
SLOWMARKEDLYNEXTYEARlGURE
#ONSUMPTIONSPENDING
&IGURE
2ECENT ECONOMIC INDICATORS SUGGEST CONTINUED STRENGTH IN
.ETIMMIGRATION
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WEAREPROJECTINGGROWTHINHOUSEHOLDCONSUMPTIONTOSLOW
MARKEDLYNEXTYEARlGURE4HISVIEWISBASEDONARANGE
OFMACROECONOMICFACTORSSUCHASLOWERNETIMMIGRATION
LOWER HOUSE PRICE INmATION LOWER EXPORT SECTOR INCOMES
ANDHIGHERINTERESTRATES
7HILE A CONSUMPTION SLOWDOWN IS OUR CENTRAL
EXPECTATION WE ARE MINDFUL OF THE RISK THAT HOUSEHOLD
CONSUMPTIONGROWTHCOULDREMAINHIGHFORLONGERESPECIALLY
SINCETHEREAREVERYFEWIMMEDIATEINDICATORSOFANIMMINENT
SLOWDOWNFOREXAMPLEWEWOULDNORMALLYEXPECTAFALLIN
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3OURCE3TATISTICS.EW:EALAND2".:ESTIMATES
GROWTHBUTWEHAVESEENNOSUCHFALLTODATE/NEPARTICULAR
&IGURE
AREA OF UNCERTAINTY SURROUNDS HOUSEHOLDS WILLINGNESS TO
!NNUALHOUSEPRICEINmATION
TAKEONMOREDEBT7EHAVEASSUMEDTHATTHERATEOFDEBT
ACCUMULATIONWILLSLOWFROMNEXTYEAR)FHOUSEHOLDSINSTEAD
CONTINUE TO ACCUMULATE DEBT CONSUMPTION COULD GROW
MOREQUICKLYTHANPROJECTEDNEXTYEAR
&IGURE
2EALHOUSEHOLDCONSUMPTION
PERCENTOFTRENDOUTPUT
3OURCE1UOTABLE6ALUE.EW:EALAND2".:ESTIMATES
7EAREPROJECTINGASHARPDECLINEINRESIDENTIALINVESTMENT
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AmURRYOFRESIDENTIALCONSTRUCTIONACTIVITYBUTTHISISALMOST
CERTAINLY PAST ITS PEAK lGURE OVERLEAF 4HIS PROJECTION
WASFORMEDONTHEBASISOFTHETYPICALRELATIONSHIPBETWEEN
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3OURCE3TATISTICS.EW:EALAND2".:ESTIMATES
THATTHEMOSTRECENTHOUSINGCYCLEHASBEENANYTHINGBUT
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&IGURE
7HILE WAGE GROWTH HAS REACHED CYCLICAL HIGHS IT
2ESIDENTIALINVESTMENT
REMAINS LOWER THAN MIGHT HAVE BEEN EXPECTED GIVEN THE
PERCENTOFTRENDOUTPUT
CURRENT TIGHTNESS OF THE LABOUR MARKET 7E PROJECT LARGER
WAGEINCREASESINTHECOMINGYEARSPARTLYDUETOINCREASED
LABOUR PRODUCTIVITY STEMMING FROM CAPITAL DEEPENING AND
PARTLYINRESPONSETOTHEINCREASINGSCARCITYOFLABOUR
"USINESSINVESTMENT
2OBUST DEMAND AT HOME AND FROM ABROAD COUPLED WITH
LOWERCAPITALGOODSPRICESFROMTHEHIGHEXCHANGERATEHAS
ENCOURAGEDSTRONGBUSINESSINVESTMENT7EPROJECTFURTHER
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3OURCE3TATISTICS.EW:EALAND2".:ESTIMATES
LABOUR SHORTAGES AT A TIME OF STRONG DEMAND "USINESS
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EXPECT THAT STRONG GROWTH IN NONRESIDENTIAL CONSTRUCTION
ACTIVITYWILLPARTIALLYOFFSETTHEFALLINRESIDENTIALINVESTMENT
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STRETCHEDFORSOMETIME
&IGURE
"USINESSINVESTMENT
ANNUALAVERAGEPERCENTAGECHANGE
,ABOURMARKET
4HE STRONG ECONOMY HAS DRIVEN UNEMPLOYMENT BELOW PER CENT AND HAS ENCOURAGED INCREASED LABOUR MARKET
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MAYFORESTALLFALLINGCONSUMPTIONGROWTHOVERTHECOMING
QUARTERS,OOKINGAHEADWEEXPECTSOLIDDEMANDFORLABOUR
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