RBNZ looking to maintain economic growth, restore inflation target
(30 July 2015 – New Zealand) Reserve Bank of New Zealand governor Graeme Wheeler said on 29 July that further monetary policy easing is likely to be required to return inflation to its target level and maintain the country’s economic growth.
Further exchange rate depreciation is necessary, given the weakness in export commodity prices and the projected deterioration in the country’s net external liabilities over the next two years, Wheeler said.
Speaking to an ExportNZ/Tauranga Chamber of Commerce audience, Wheeler said that in mid-2014, New Zealand’s terms of trade were at a 40-year high, but over the past 15 months the economy has experienced several shocks.
Export prices for whole milk powder have fallen 63 percent since February 2014, and oil prices are currently more than 50 percent below their June 2014 level.
Net immigration and labour force participation are at historic highs, and the real exchange rate has declined steadily since April 2015.
Over the past two years, annual CPI inflation has been in the lower half of the 1 to 3 percent target band, except for the period since the December quarter 2014 when the fall in oil prices brought CPI inflation to very low levels.
The Bank expects annual CPI inflation to be close to the midpoint of the 1 to 3 percent target range by the first half of 2016.
“There are, however, several risks and uncertainties around the inflation outlook.
“These include the future path of the exchange rate, which will be influenced by future commodity prices, and the speed with which the recent depreciation feeds through to higher inflation.”
Wheeler said that, despite recent declines, the exchange rate remains above the level consistent with current economic conditions.
Regarding interest rates, he said that current monetary policy settings are providing stimulus to the economy at a time when output looks to be growing around 2.5 percent, slightly below potential, and core inflation remains a bit below the mid-point.
“We will review our growth forecasts in the September Monetary Policy Statement but, at this point, we believe that several factors are supporting economic growth.
“These include the easing in monetary conditions, continued high levels of migration and labour force participation, ongoing growth in construction, and continued strength in the services sector.”
Wheeler said that, in returning inflation to the mid-point of the target band, the Bank has to avoid unnecessary volatility in output, interest rates, and the exchange rate.
“Our judgement in the current circumstances is that aiming to return inflation to around its medium-term target level in about nine to 12 months’ time is an appropriate speed of adjustment.
“This may not always be the appropriate speed of adjustment.
“Nor does it mean that the Bank will necessarily deliver a precise outcome as the economy is constantly experiencing shocks and disturbances that policy may need to counter or accommodate.”
“The Bank continues to be concerned about the financial stability risks and risks to the broader economy that would be associated with a major correction in Auckland house prices.
“In the current circumstances, macro prudential policy can be helpful in reducing some of the pressures arising from the Auckland housing market,” Wheeler said.
“While a strong supply response over several years is needed to address Auckland’s housing imbalance, macro-prudential policy can help to lower the financial and economic risks while important regulatory and infrastructure issues are addressed and additional investment in new housing takes place.”
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