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STRONGLY OVER THE PAST YEAR 'ROWTH IS EXPECTED TO SLOW
PRICESINMANYPARTSOFTHECOUNTRY
GRADUALLY AS THE HIGH EXCHANGE RATE SLOWER POPULATION
s #ONSUMER CONlDENCE REMAINS AT VERY HIGH LEVELS
GROWTH AND THE LAGGED EFFECTS OF LAST YEARS TIGHTENING IN
!LTHOUGH GROWTH IN RETAIL SALES MODERATED IN THE
MONETARY POLICY INCREASINGLY CONSTRAIN DEMAND (OWEVER
$ECEMBER QUARTER POSSIBLY DUE TO BAD WEATHER
TODATETHEDOMESTICECONOMYHASSHOWNMOREMOMENTUM
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IN*ANUARY
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HAS PROMPTED SOME FURTHER TIGHTENING IN MONETARY POLICY
ECONOMYWEHAVESEENNOEVIDENCETOSUGGESTTHATINmATION
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PACE 4HE VERY TIGHT LABOUR MARKET HAS BEEN REmECTED IN
THEINmATIONOUTLOOKPLAYOUT
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/UR PROJECTIONS HAVE BEEN UPDATED TO INCORPORATE
2ECENTDEVELOPMENTS
'ROWTH IN '$0 OVER THE 3EPTEMBER QUARTER WAS
WEAKER THAN EXPECTED BUT THIS WAS DUE LARGELY TO TIMING
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THE $ECEMBER QUARTER WHILE CAPACITY UTILISATION HAS
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s 7ORLD COMMODITY PRICES FOR SOME OF OUR KEY EXPORTS
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s 7HILELASTYEARSMORTGAGEWARHASMADEHOUSINGSECTOR
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DECISIONS
SUCHPRESSURESEMERGEDTHENAFURTHERPOLICYTIGHTENING
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COULDNOTBERULEDOUT
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7HILE THE RISE OF THE .EW :EALAND DOLLAR WAS LIMITING
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THE/FlCIAL#ASH2ATE/#2WASGRADUALLYINCREASED
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OFTHIS3TATEMENTWEHAVEUNDERTAKENAFURTHERlRMINGIN
OUTPUT INTEREST RATES AND THE EXCHANGE RATE 3INCE WE
MONETARYPOLICYINORDERTOENSURETHATTHEPROJECTEDPATHOF
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OUTCOMES WELL OUTSIDE THE TARGET BAND -ONETARY POLICY
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POTENTIALLYINCREASEVOLATILITYININTERESTRATESTHEEXCHANGE
RATE AND OUTPUT 4HIS REmECTS THE ABSENCE OF ANY FURTHER
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A FURTHER TIGHTENING IN POLICY AT THIS STAGE OF THE CYCLE
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THEPOTENTIALTOACCENTUATETHEECONOMICCYCLEPARTICULARLY
IF WE MISREAD THE STRENGTH OR TIMING OF THE FORCES ACTING
ONTHEECONOMY(OWEVERNOTRESPONDINGTOTHEPROSPECT
OF STRONGER INmATION PRESSURES CREATES A RISK THAT INmATION
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CONSISTENTWITHTHE04!
7E HAVE ALSO PAID PARTICULAR ATTENTION TO THE LIKELY
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THEECONOMYEVOLVESDIFFERENTLYTOOURCENTRALPROJECTIONS
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DEMAND MAINTAINS MORE MOMENTUM THAN IN OUR CENTRAL
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ARE WEAKER THAN WE CURRENTLY EXPECT )N THAT INSTANCE
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WOULDAPPEARTOBESMALLGIVENTHATOURCENTRALPROJECTION
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4HE MESSAGES FROM SCENARIO IN REGARD TO SECTION
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NOW FOLLOWED BY WEAKER THAN EXPECTED EXTERNAL DEMAND
CONDITIONS COULD POTENTIALLY EXACERBATE THE ECONOMIC
SLOWDOWNANDINCREASETHEPRESSURESONPARTICULARPARTSOF
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OFSUCHPRESSURESCOULDBEREDUCEDBYANEASINGOFPOLICYAS
THESIGNSOFTHEDOWNTURNBECAMEAPPARENT
7HETHERAFURTHERTIGHTENINGINMONETARYPOLICYWILLBE
REQUIRED OVER THE MONTHS AHEAD WILL DEPEND ON HOW THE
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RULEOUTFURTHERPOLICYTIGHTENING
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CONSIDERSAWEAKEROUTLOOKFORTHEEXTERNALSECTORARISING
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IN THE YEAR TO 3EPTEMBER 4HE ECONOMY HAS BEEN
SPENDING REMAINS RELATIVELY SUBDUED AND GROWTH REMAINS
WELL SUPPORTED BY STRENGTH IN THE DOMESTIC SECTOR WITH
HIGHLYRELIANTONEXPORTACTIVITY)NmATIONHASEASEDALTHOUGH
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THE SAME PERIOD TRADABLES INmATION ACCELERATED SHARPLY
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INmATION MEASURES HAVE RECENTLY PICKED UP BUT REMAIN
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BENElTEDFROMTHEHIGHWORLDPRICESGENERALLYSEENBYTHE
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.ONCOMMODITYMANUFACTUREDEXPORTS
QUARTERLYTOTAL
3OURCE!.:.ATIONAL"ANK,TD
4ODATEHIGHCOMMODITYPRICESHAVELIMITEDTHEIMPACT
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VOLUMES HAVE CONTINUED TO TREND UP OVER RECENT YEARS
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3OURCE3TATISTICS.EW:EALAND
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4HE MAIN COMPONENT OF SERVICE EXPORTS IS SPENDING BY
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QUARTERLYTOTAL
FOLLOWING THE AFTERMATH OF 3!23 -UCH OF THIS INCREASE
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&IGURE
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HASBEENHIGHOVERWITHTHESTRONGEXCHANGERATEAND
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LOWAIRFARESMAKINGOVERSEASTRAVELMOREATTRACTIVE4HISHAS
DOLLAR
BEENREmECTEDINIMPORTSOFSERVICESWHICHINCREASEDBY
4HE RAPID RISE OF THE EXCHANGE RATE AND LOW INmATION
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AMONGST OUR TRADING PARTNERS DRAMATICALLY REDUCED IMPORT
3INCE EARLY OUR CURRENT ACCOUNT BALANCE HAS
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ONIMPORTPRICESISSTARTINGTOEASE!LTHOUGHTHEEXCHANGE
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THEECONOMYATARAPIDRATERATHERTHANOUREXPORTSBEING
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WEAK-ORERECENTLYINTHE3EPTEMBERQUARTEROFOUR
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INTERNATIONALINVESTMENTINCOMEDElCITWIDENEDDUETOTHE
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HASMODERATEDRECENTLYASTHEHOUSINGMARKETHASBEGUNTO
SLOW #APACITY CONSTRAINTS AND A HIGH EXCHANGE RATE HAVE
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)MPORTS OF INTERMEDIATE GOODS HAVE ALSO BEEN
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4HE DOMESTIC ECONOMY HAS CONTRIBUTED SIGNIlCANTLY TO
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#ONSUMPTIONGROWTHHASBEENSTRONGINRECENTYEARS4O
STARTWITHTHISGROWTHWASDRIVENBYSTRONGNETIMMIGRATION
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OVERLEAF %MPLOYMENT HAS GROWN STRONGLY OVER THE PAST
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HOUSEHOLDCREDITANDMORTGAGEGROWTHHASBEENDRIVENBY
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&IGURE
#ONSUMPTIONGROWTHANDCONSUMERCONlDENCE
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&IGURE
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7ELL SUPPORTED LABOUR INCOMES AND LOW PRICES IN
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THE RETAIL SECTOR FROM THE HIGH EXCHANGE RATE HAVE KEPT
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/VERTHEPASTMONTHSTHEHOUSINGMARKETHASCOME
3TRONG CONSUMER CONlDENCE IN THE SECOND HALF OF
OFF THE HIGHS REACHED IN LATE EARLY (OWEVER
SUGGESTS THAT CONSUMER SPENDING WILL REMAIN STRONG
THE HOUSING MARKET APPEARS TO HAVE STABILISED SOMEWHAT
INTOEARLY
IN RECENT MONTHS WITH THE NUMBER OF DWELLING CONSENTS
3INCEREACHINGAPEAKIN!PRILTHEANNUALGROWTH
ISSUEDSTAYINGSTEADYANDHOUSESALESTICKINGUPlGURE
RATE OF TOTAL HOUSEHOLD CREDIT HAS SLOWED BUT REMAINS AT
OPPOSITE3OMEOFTHISINCREASEINHOUSESALESISAREmECTION
HISTORICALLY HIGH RATES lGURE 'ROWTH IN CONSUMER
OFLOWMORTGAGERATESOFFEREDBYBANKSIN.OVEMBERAND
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$ECEMBER .ONETHELESS HOUSE SALES STILL REMAIN ABOVE
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RESIDENTIAL INVESTMENT HAS INCREASED STRONGLY OVER PRICE INmATION lGURE 4HIS INCREASE IN HOUSE PRICES
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PEOPLE TO BUILD NEW HOUSES AND CARRY OUT ADDITIONS AND
lGURE4HISWILLPROLONGPRESSURESINTHEALREADY
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LEVELSOFRESIDENTIALINVESTMENTSEENOVERTHEPASTTWOYEARS
lGURE
&IGURE
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&IGURE
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ANNUALPERCENTAGECHANGE
3OURCE3TATISTICS.EW:EALAND
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/THERBUSINESSINVESTMENTALSOPICKEDUPSTRONGLYOVER
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$ESPITETHISLIFTININVESTMENTlRMSARESTILLREPORTINGHIGH
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INCREASED PRODUCTION lGURE !N ABOVEAVERAGE
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&IGURE
&ACTORSLIMITINGINCREASEDPRODUCTION
LABOURANDCAPITAL
3OURCE3TATISTICS.EW:EALAND.:)%2
&ISCALPOLICY
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3OURCE.:)%2
0RODUCTIVECAPACITY
4HELABOURMARKETANDWAGES
4HE SUSTAINED PERIOD OF ABOVEAVERAGE GROWTH IN RECENT
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EVIDENTINTHE.:)%2S1UARTERLY3URVEYOF"USINESS/PINION
! STRONG ECONOMY OVER THE PAST FEW YEARS HAS INCREASED
lRMS DEMAND FOR LABOUR RESULTING IN STRONG EMPLOYMENT
GROWTHlGURE4HISINCREASEDDEMANDFORLABOURHAS
ENCOURAGED PEOPLE TO ENTER THE LABOUR FORCE WITH LABOUR
13"/ MEASURE OF CAPACITY UTILISATION WHICH INCREASED
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AND LABOUR CONSTRAINTS n 3TATISTICS .EW :EALAND NOTE THAT
HAVEBEENMORETHANOFFSETBYTHEGROWTHINEMPLOYMENT
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REACHEDPERCENTINTHE$ECEMBERQUARTERnANHISTORICAL
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5NEMPLOYMENTRATE
3OURCE3TATISTICS.EW:EALAND
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4HIS STRETCH IN THE LABOUR MARKET HAS STARTED TO PUT
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ORDINARYTIMESALARYANDWAGERATES4HEPROPORTIONOFlRMS
INCREASINGLYHIGHERWAGESTOATTRACTANDRETAINSTAFF!NNUAL
INCREASING OVERTIME WAGE RATES HAS ALSO BEEN TRENDING UP
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)NDEX,#)AREATCYCLICALLYHIGHLEVELSlGURE
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4HESEOBSERVATIONSAREBROADLYSUPPORTEDBYMOVEMENTS
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&IGURE
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)NmATION AS MEASURED BY THE 0RODUCERS 0RICE )NDEXES
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HAVEEXPERIENCEDMOREPRICEPRESSURETHANOTHERSnPRICES
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3TRONG NONTRADABLES INmATION HAS REmECTED INCREASING
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ABOVE PER CENT SINCE EARLY )T IS OUR VIEW THAT THE
AS HAVE PRICES IN METAL MANUFACTURING -EANWHILE
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ECONOMYHASBEENOPERATINGABOVEITSNORMALCAPACITYFOR
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