Reserve Bank of New Zealand, Monetary Policy Statement, August 2018

Transcription

1 I.3F Reserve Bank of New Zealand, Monetary Policy Statement, August 2018 Report of the Finance and Expenditure Committee Fifty-second Parliament (Michael Wood, Chairperson) October 2018 Presented to the House of Representatives Michael Wood Chairperson

2 I.3F MONETARY POLICY STATEMENT, AUGUST 2018 Contents Recommendation... 3 Introduction... 3 Official cash rate unchanged... 3 Business confidence and employment... 4 International developments... 5 Appendix

3 MONETARY POLICY STATEMENT, AUGUST 2018 I.3F Reserve Bank of New Zealand, Monetary Policy Statement, August 2018 Recommendation The Finance and Expenditure Committee has conducted an examination of the Reserve Bank of New Zealand s Monetary Policy Statement, August 2018, and recommends that the House take note of its report. Introduction This report summarises the contents of the Reserve Bank s monetary policy statement (MPS), released on 9 August 2018, and the main issues we discussed in our meeting with the Governor of the Reserve Bank. Official cash rate unchanged The MPS announced the Reserve Bank s intention to leave the official cash rate (OCR) unchanged at 1.75 percent, where it has been since August As in the May 2018 MPS, the Governor stated that the risks that could shift the direction of the Bank s next OCR move are still evenly balanced, meaning it could go up or down. This time, however, the Governor also stated that the Bank forecasts that the OCR will remain at 1.75 percent throughout 2019 and into MPS modelling that could require changes to the OCR The MPS includes two possible models that could result in a shift to the OCR. Domestic inflation could rise faster than the Reserve Bank s projections, if increasing costs pushed firms to raise their prices higher than the Bank has assumed. In this scenario, the Reserve Bank envisages it would have to raise the OCR gradually from 2019, as inflation rises, to a high of around 2.25 percent. This would reduce domestic demand and allow inflation to converge back to around 2 percent. The scenario that could result in a downward shift to the OCR stems from the fact that GDP growth has softened unexpectedly over the past 12 months. The MPS notes that this has occurred despite improving global conditions, continued strong population growth, and low interest rates. The Reserve Bank s central projection expects GDP growth to recover. However, the MPS notes that there is a risk that this may not happen, as the housing market remains softer and business confidence surveys show confidence falling. This scenario would require a downwards shift of the OCR between 2019 and 2020, to boost GDP growth, employment, and inflation. GDP growth remains lower than projected New Zealand s GDP growth is moderating, but the Reserve Bank expects it to recover to some extent during the rest of 2018 and in However, the MPS notes that the Bank expects recent weakness in GDP growth to persist in the near term. In the medium term, 3

4 I.3F MONETARY POLICY STATEMENT, AUGUST 2018 growth is expected to increase as a result of fiscal policy (particularly the Government s KiwiBuild scheme and government transfers), export growth, and supportive monetary policy settings. The Bank also expects growth to be supported by a weaker New Zealand dollar, as well as by new business investment in capital, as businesses face workforce capacity constraints and higher real labour costs. We noted that it was unusual for the Reserve Bank to forecast its intention to maintain the OCR at 1.75 percent into 2020, and asked about the main drivers for that announcement. The Governor said the main reason is the fact that growth has been slowing over the last four years, to a point that is slightly lower than the Bank had anticipated. He said the Bank has been continually surprised by inflation remaining lower than expected, and by growth being slower to respond to it. In response to questions, the Governor said, A cut now in the face of observed and potential future slower economic growth than anticipated, or whilst also inflation pressure itself is rising you know, core inflation has been ticking up or the watch, worry, and wait challenge. Consumers price index (CPI) inflation was 1.5 percent in the July 2018 quarter. This remains inside the Reserve Bank s 1 3 percent target range, but towards the low end. We noted that over the last several MPS reports the Bank has projected a rise to 2 percent, but this has failed to materialise. We heard that the key reason has been unbelievably low world inflation due to downward price pressure. Low international prices for imports have resulted in New Zealand businesses being reluctant to raise their prices. We noted that the MPS emphasises Government spending as a factor behind projected midterm GDP growth, and asked how much of the Reserve Bank s growth projections for the next several years are being propped up by Government spending. We heard that Government fiscal stimulus is only one part of what is a well-supported economy in New Zealand. The Governor pointed to consumer spending, residential construction, and exports as being among the other strong components in the economy. The Bank expects that Government spending will contribute to the pick-up of growth in the economy, but it will do so more by acting as an accelerant to net export growth, which will be the leading factor. Business confidence and employment We noted that recent business confidence surveys have indicated falling confidence by business owners in the economy, as well as in their own investments and activities. The Governor told us that most of the responses in the surveys are not very useful to the Bank in making its forecasts. However, the Bank does examine the confidence of businesses in their own activity and investments, as it provides a better sense of where the economy is likely to go. He said that, although those measurements have eased, they have not fallen nearly as sharply as headline business confidence. Some of us wondered whether the lack of business confidence might lead to an unwillingness to take on employees, particularly in light of a recent minimum wage increase and the Government s signalled forthcoming changes to employment law. This could mean that unemployment does not continue to fall, as the Bank is projecting. The Governor acknowledged that businesses in some sectors are nervous about hiring, and some of that is 4

5 MONETARY POLICY STATEMENT, AUGUST 2018 I.3F reflected in the business confidence surveys. He also acknowledged that some businesses face skills shortages and some are unable to offer high enough wages to fill vacancies. However, he said the rapid rise in labour force participation from around 60 percent of the working-age population to 70 percent the highest rate in the OECD has been the main factor affecting the employment picture, because despite growth in employment and jobs, even more people have been entering the labour force. Employment and wage growth issues The Reserve Bank expects a slowing in employment growth over its forecast period. Employment has been growing at around 3 percent each year, and the Bank expects growth to remain between 1.5 and 2 percent until about We heard that the Bank projects unemployment to keep falling as lower migration leads to slower growth in the labour supply, and it expects that the participation rate will not increase further. We note that the Bank has been expecting wages and prices to increase over the last few years, which has not eventuated. However, wage growth has started to lift, which the Bank sees as an encouraging sign. If wage growth lifts to just over 2 percent, the Bank considers that it will support its target of 2 percent CPI inflation. Some of us expressed concern that recent large public sector pay settlements may spill over into the private sector and other industries, affecting the Reserve Bank s projections for labour cost and the CPI. The Governor said that assumptions about demands for higher wages were built into its forecasts. He identified two areas for the Bank to watch carefully: the level of wage growth that is likely to spill over between sectors above their relative productivity, and the amount of wage growth that businesses pass on to consumers through price increases. International developments The MPS states that economic growth is strong among New Zealand s trading partners, but the Reserve Bank expects it to moderate over its forecast period. Inflation has increased in the economies of many trading partners, and wage pressures are emerging. The Governor told us that world inflation, New Zealand s current exchange rate, and its current terms of trade are all very positive in the Bank s outlook for New Zealand s economy. However, some of the more dramatic headlines have cast a shadow over this positivity. Trade tensions have increased over the past several months, particularly between the United States and China. The United States has also implemented tariffs on steel and aluminium products from all countries, and has threatened to impose tariffs on imports of vehicles and automotive parts. The Governor noted that the current tariffs and barriers are small relative to the scale of global trade, but there are risks if the tensions escalate. The MPS notes that financial conditions in emerging markets have started to tighten. As more advanced economies have begun to withdraw their monetary stimulus, they have attracted a great deal of capital from the emerging markets, due to the increased returns available. Central banks in some emerging market economies have responded to these 5

6 I.3F MONETARY POLICY STATEMENT, AUGUST 2018 capital outflows and the depreciation of their currencies by tightening their monetary policy settings. 1 The MPS states that, to date, New Zealand has been relatively unaffected by the rise in global trade tensions and the tightening of financial conditions in emerging market economies. However, if the trade tensions escalate dramatically, it could have a negative effect on New Zealand s ability to export. About 20 percent of New Zealand s exports go to China, and 10 percent go to the United States. Countries with close links to China could also place restrictions or tariffs on imports from New Zealand. 1 Reserve Bank of New Zealand, Monetary Policy Statement, August 2018, p

7 MONETARY POLICY STATEMENT, AUGUST 2018 I.3F Appendix Committee procedure We met on 9 August and 19 September 2018 to consider the Monetary Policy Statement, August We heard evidence from the Reserve Bank of New Zealand. Committee members Michael Wood (Chairperson) Hon Amy Adams Kiritapu Allan Andrew Bayly Rt Hon David Carter Tamati Coffey Hon Judith Collins Ian McKelvie Willow-Jean Prime Dr Deborah Russell David Seymour Fletcher Tabuteau Dr Duncan Webb Advice and evidence received A transcript of our hearing is available on the Parliament website, 7