Monetary Police Statement, May 2018

Transcription

1 Transcript Monetary Police Statement, May 2018 Finance and Expenditure Committee 10 May 2018 Members Michael (Chairperson) Fletcher Tabuteau (Deputy Chairperson) Rt Hon David Hon Ruth Dyson Paul Eagle Brett Hudson Anahila Kanongata a-suisuiki Ian McKelvie David Seymour Stuart Smith Jamie Strange Dr Duncan Webb Lawrence Yule Witnesses Reserve Bank of New Zealand Adrian, Governor Dr John McDermott, Assistant Governor and Head of Economics Geoff Bascand, Deputy Governor and Head of Financial Stability As per usual we ll invite you to open up with some comments. People have obviously received the MPS, read it and some of the subsequent commentary, but if you can take us through some of the key points that you think the committee needs to consider and the committee will then have a range of questions for you. Thank you, and tēnā koutou katoa and kia orana. It s a great privilege to be here, and we understand our responsibility. So I ll keep my comments short. I just wanted to quickly introduce Geoff Bascand, the Deputy Governor of the bank, and he will answer all the tough questions, and Dr John McDermott also, who heads up our economics team. So both really have been in great support. I won t re-read the opening statement. What we did today was we kept the official cash rate at 1.75 percent, and we made it clear that it will be there for some time and that the balance of risks are even; i.e., it could go up or down at the next move at some point in time. I quipped this morning that it s the easiest decision I ve had to make in a long while. But the hardest 1

2 decision I ve had to think about is of what we do next because of the even balance and risks. So we believe the New Zealand economy in a cyclical sense is in a good position. We ve had very strong economic and employment growth over the recent period and that has occurred at a time with low and stable inflation. We recognise that the actual inflation rate, which is currently running at about 1.1 percent consumer price inflation, is below the midpoint of our inflation target, which is 2 percent, and that s why we are continuing to have an expansionary monetary policy position. We re still trying to blow air into the balloon to keep things growing. It s a dual mandate so we ve given due consideration to both our inflation target and how we can best contribute to maximizing sustainable employment, and we believe we have done that. There are many, many measures which we outline in the document and there is much to learn around what is maximum sustainable employment and how we can best contribute to it. What we see at the moment is by retaining expansionary monetary policy. The risks ahead as always actually, just before I go to the risks, I just want to say the growth in employment and the increase in labour force participation in New Zealand over recent years has been exceptional. So we ve had very strong employment growth and that has been met with an equally strong labour supply both, in particular, people working longer, age-wise, older workers returning to the labour force, more women entering and participating in the labour force, and also the net immigration, and that has been a strong supplier of labour and is a strong contributor to what we would call our potential economic growth rate in the country. The risks to it well, we have projected consumer or consumption per person to be growing, but that growth rate s slowing, and driving that is really a limit to credit, a slowing population growth, and a slowing rate of increase in house price inflation, which comes through the wealth impact. You know, that is a risk. We could end up with stronger consumption, for example, if house price inflation continued more or individuals continued at the same rate of consumption. So that s an upside risk. I would say, on the downside, what we have been surprised is the lack and absence of pass-through from capacity constraints into rising consumer inflation, and that s why we re giving the benefit of the doubt to stay on the expansionary side for now. We ve also had a very positive global economic growth situation. That remains, but financial conditions are tightening internationally. They re tightening through deliberate reasons with central banks in the world raising interest rates and deliberately to contain growing inflation. But there is always that risk as well that longer term interest rates could get spooked market volatility, particularly given the high levels of debt that exist across, effectively, all OECD countries at the moment; [inaudible] Japan. You know, the debt levels are high. So that s always a risk 2

3 Webb Unidentified Webb McDermott Seymour Seymour about higher world rates leading to tighter conditions and slower spending. I think I will stop my comments there I ve covered the ground. Thank you. Very good. Thank you, Governor. I ll open it up to the committee for questions. Can I kick off with one about just the kind of per capita problem. You said consumer spending is falling, or The growth rates. or consumption. And certainly Statistics New Zealand came out recently and saw a significant drop off in retail spending as well, and also in terms of per capita productivity seemed to be quite flat as well. What s the magnitude of that risk? Is that a trend we can expect to see continue? We think the risks are evenly balanced, if anything, and I ll let John talk. If anything, we see the risks to the upside on consumer spending per capita relative to our forecast. Just to be clear, we see consumer spending growth to continue but at a slower rate, and that s based on the population drivers, the wealth drivers we talked about, and that is a big part of what gives us comfort, to have easier monetary conditions. John, do you want to on productivity? On productivity, we re seeing some slow growth in productivity both here in New Zealand and overseas. There s lots of questions about why that is the case. One of them is, you know, even though it s a long time after the global financial crisis, it was a big shock, the biggest in 80 years, and the world is trying to find the optimal allocation of capital and labour and put them together. It s been a difficult period of generating new ideas and putting them into practice and getting businesses to invest into that framework. New Zealand has been no exception to that global story. Thank you, Governor. You ve said that the outlook for your next, I guess, statement is equally likely to be up or down; in other words, if you were betting you d expect it to stay the same. Does that mean that people can expect mortgage rates to be stable for the coming year? Unfortunately, we can t speak on behalf of all the retail banks. There s, you know, lots of things that happen between the official rate and what the person on the street pays for mortgage rates, but in our projection there won t be any instability coming from the official cash rate. It will be more to do with the feed through from global lending rates and margins in banks. And can I just ask a separate question. In light of the new PTA, do you personally believe you can achieve anything other than price stability through monetary policy? I believe that we can achieve what we re setting out to achieve with the new policy targets agreement. What I strongly believe is that we can t influence to any large degree sustainable employment. We can contribute to maximising sustainable employment. Sustainable employment is driven by many things, as we know, outside of the level of interest rates skills, demand, mobility, incentives and so what we had to do is have a good 3

4 Seymour Seymour Seymour sense for where we think that level of sustainable employment is and do our best to make sure that actual employment through the demand side influence we can have is somewhere near it. At the margin, just not to be too technical, but at the margin the longer that people stay out of the labour market, the more likely it is that they won t reenter. So there is, in the parlance it s hysteresis we stole it out of the engineering life. You re welcome. Ha, ha! So, you know, we are aware of that, but that is very much at the margin relative to other things that determine long-term sustainable employment. So you said that there is a way that you can kind of, I guess, cap off how it is that you can contribute to that sustainable employment level? Because I think you said it but it wasn t quite So the first thing is that monetary policy primarily helps on the demand side of the economy. We can in part influence the level and pace of spending in an economy. So if, for example, the labour market is well below what would be considered sustainable employment, we would see two potential things happening and probably together. The first one would be inflation declining. And the second one would be unemployment rising. That would give us an opportunity to lower interest rates and increase demand, which would see both employment growth and inflation start to rise. It s interesting. You mentioned the opportunity to influence employment is if the stars align and you have low inflation. What if you have high inflation and high unemployment? What can you do then? We ve had that period, and I think it s a very good question. You know, that s stagflation: high and rising inflation and very high unemployment. And I know that the Rt Hon David we lived amongst that in the 1970s. What is happening there is, in a sense, either you ve had a supply shock, which in the case of the 70s was oil, and you had a rapid increase in inflation and the economy hasn t adjusted, so you ve ended up with unemployment and continued rising inflation. The single thing we need to do there is balance our challenge, because the world I just described there is one where inflation expectations, where people think inflation is going, has become unanchored, and at that point the central bank would be putting more emphasis on returning inflation expectations to something low and stable, and that would be outweighing what we may be able to do in the labour market. But throughout all of that, you have to remember, we aren t influencing the sustainable employment level; we re trying to re-anchor inflation expectations. Can I just ask about the sustainable employment? You make the comment that it is subject to significant uncertainty. So how are you going to monitor 4

5 McDermott C. McDermott whether you are reaching the target? What are the specific indices you re going to add within the band so that you know you re achieving the PTA? It s a very good question. I will just start, first, and say the uncertainties around what is the level of maximum sustainable employment are no different to the uncertainties around where we think the potential growth rate of the economy is. They re almost the same. In other words we ve been running monetary policy through something where we have tried to see where is actual output relative to something we ve called potential output if actual is running above potential there s inflation pressures etc. It s a very similar level of uncertainty around what is the maximum sustainable employment. What we ve done, and it s deliberate because we are learning, we are providing many indicators of what we would start to look at to get a proper sense of maximum sustainable employment. And there is a box in our Monetary Policy Statement yeah, box C which goes through actually, let s go through a list. I think we managed to get up to about seven or eight. You know, it s the level of employment [inaudible] number. It s the employment rate how many people are employed relative to working age. It s the participation rate how many in the economy actually want to participate. It s the unemployment rate, which too many people jump to immediately as a measure of it. That s just that s quite a small residual relative to some of these other uncertainties. Underutilization is a really interesting one. You know, there are people out there who want to work more but can t at that point, and the underemployment rate. So, anyway, I won t go through them all, but there is and we deliberately put those out there and we plotted them. It s in figure C(6). And you can see that there s a wide range. They all follow each other, fortunately, but there s a wide range around to say we are at maximum sustainable employment. Interestingly enough, about the midpoint of it suggests we are. But we could be above, we could be below very similar to the potential output graph that we provided in there as well. Around three months ago when we had your predecessor here, the, sort of, only positive comment on it he said is domestic inflation will rise. He didn t actually I didn t ask him when, but in actual fact it s fallen in the last three months. Why is that? Is that correct on the? Our core or our underlying inflation rate is pretty stable. It s actually ticked up a little bit. There are some short-term factors that influence the headline rates. Removal of tertiary education fees, this has come through and that impacts a particular quarter s number. So, you know, we pay more attention really in a sense to that underlying trend, and the underlying rate, which, you know, is still sitting around one and a half, and a bit below where we d like it to be. But we do still see it very much in the way that the Governor 5

6 McDermott outlined these pressures beginning to come through and increasingly coming through will raise those rates over time. How significant was the free tertiary education? For our quarterly number I think it was 0.2. Sorry? 0.3 percent. Yeah, but that then is the issue about significant I mean it s a change in a price level that will be temporary in terms of its ongoing impact on inflation. So many of these things, the banks acknowledge that it explains what happened, but in terms of monetary policy is then ignored. A very good example, and that is looking back in recent history of CPI was the introduction of GST, and you saw a significant spike in headline CPI inflation. But we knew it was a one-off and you look through that. So that is a challenge and we are acknowledging and also reacting to the fact that underlying core inflation has been slow to respond to an expansionary monetary position. I just want to probe on that a little bit more because sort of it s a thing that we keep being told but never quite gets here. So we ve had successive hearings like this where we ve been told that [inaudible] where we feel that we re going to get up towards that 2 percent mark. Yet we have, in a sustained way since 2010, been sitting there. That leads to the obvious question as to whether we can have a more accommodative monetary policy. You explained your judgment around that, about setting up fairly well. Can you talk to us about whether you re seeing anything different at the moment that s actually going to get us up to around 2 percent? It might be different to what we heard a year ago. Yeah, a very, very good question I totally understand that why do you believe us this time? There are many differences. First and foremost is that we have continued to increase the capacity pressures in the economy. You see that quite starkly in the labour market data, for example; you know, the level of employment and the difficulty of finding suitable labour is getting louder and louder and clearer and clearer. What we ve been surprised with, though, on that dimension, is the absence of sustained wage inflation and / or passing on prices if margins are being compressed. You know, there being many fixed contracts and the wage inflation has been dampened by the ongoing labour force participation rate and net new workers. At some point that is running a course. You know, you can t go north of 100 percent participation. And so, you know, we are getting up to we are at record high New Zealand participation rate levels. So it s one thing to say we re closer. The other part that we re being surprised by is that lack of pass-through from capacity pressure to end consumer price inflation, and so we re continuing to work on that. Our challenge, of course, is that inflation expectations are very well anchored at 2 percent, which is fantastic. Business people start to need thinking about 2 percent inflation. What 6

7 Bascand Hudson McDermott we ve noticed is the best way of explaining current wage setting is current inflation. People are almost looking backwards when they re wage setting. What else has happened? Well, internationally, you re seeing inflation pressures rise now, and central banks having to act on that, and you ve seen nominal bond yields, particularly in the US, increasing, which is good news because it means that their economies are recovering on a sustainable basis and capacity is being used up. So there is a global inflation pressure rising. So where we ve been getting surprised around very low import prices, that is likely to be less so in the future. Anything? No, I think that s the main thing. If we re still sitting here say in the February hearing next year and we re still seeing core inflation anchored at around 1.5 or a little bit below, does that potentially give you further pause for thought? Absolutely. Absolutely. And by the way this is, you know, the financial markets, for example, their reaction today has been a lower exchange rate. It s almost like, Oh, they really are going to retain this position for as long as they said they were before. And we re seeing that now filtering into the financial markets where, as was asked before, you know, in terms of lower mortgage rates. These things are being passed through. If we had followed kind of the mean market expectation, we would have been sitting much tighter than what we have been for a while. Can I just make one point. Our inflation target is 2 percent midpoint; 1 to 3 percent range. We ve had very low and stable inflation and significant employment growths, and 1.5 percent core inflation, I believe, has been an exceptional performance from this bank. So just around the risk of imported inflation, particularly around so I notice on table 2.1, on page 10 you ve got a credit risk position there that the price of oil would drop, but in the last, sort of 48 hours, we ve had a bit of global news that might or might not give you pause for thought on that. So I d like your comment on the risk now to I would say more increase in oil prices over the next wee while and whether that might be short-term or So many people have gone broke forecasting oil prices and they re not working in New Zealand dollars! Our base assumption is that we d be around US $55 per barrel. And what s that is that a Texas indicator? Dubai. Dubai. They re all there or thereabouts. Why that? Because that is really a global ceiling for the long term on oil prices, because alternative energies become viable and also fracking becomes viable. So the ability to turn supply on and off based on marginal prices has improved significantly over the last 10 years, and so, you know, $70, $75 where they are will be people will be reopening supplies and in fact that s what we re hearing at the 7

8 Bascand Tabuteau Tabuteau moment. So that s why we re always, wherever it starts, we have it coming back to that mean marginal-type rate. I might just add that while oil s, you know, a really highly volatile price and can throw our forecasts around, the general sort of lift in commodity prices from around the world has actually given us a big confidence in that global inflation story that the Governor was talking about. You re actually seeing metals prices and other prices a bit more solid, reflecting the demand story, and expect to see some of those flow through into domestic costs in some of these other countries, and hence through the Offsetting that, probably the biggest single shift that happens to import prices is not necessarily a specific offshore commodity but it s our exchange rate. And that has been very well behaved following, effectively, the terms of trade, which are at very strong levels. Yeah, thanks. I just wanted to go back and just reflect on the constraints issue in terms of resource. You spoke about the availability of the capital and professional resource and there s not a lot left for providers, I think. And then you touched on the fact that there s perhaps a historical mentality of businesses, in terms of price intercept. So for me the question then becomes what s the timing of you know, how critical will be that change in thinking of businesses in terms of real constraint capacity issues and all of a sudden a business is thinking, Hold on. This isn t the 2010 to 2016 period. We need to make some real pricing decision changes now.? Yeah. So I think that s a fantastic question. It s one of the major uncertainties. What we ve done in this forecast is we ve assumed that their pricing behaviour is very similar to how they ve been behaving over the last two years; i.e., that they are just reacting to current inflation. Should they start to think about expected inflation, then that would be an upside risk to the OCR, and that s why we re saying, you know, it s evenly balanced either side. I would say that capacity pressures are there and the willingness to invest and stay ahead of those pressures is also there. This forecast has rising business investment. So although overall business confidence has been down, their measures of their own activity, how busy they are, has remained high and, you know, that is the key indicator for business investment intentions, rather than how they might be feeling about the Super 15 taking whatever it is, at the time. One more question, Mr Chair. This again is something I should have probably supped in on, but we re talking about oil prices and the behaviour of the financial and monetary policy around the world. So are you getting the feeling that there s a sense of the moving back to a normalization of monetary policy such that you think that what we would consider the traditional levers perhaps are more apt to have the effect that we would have anticipated, going forward? Yes I do. I think, you know, the rise in nominal interest rates we re seeing globally is truly supported by a rise in real economic growth and some inflation coming back into the system. So it is a renormalization. It s also allowing the central banks globally to take some of the risks that they 8

9 Webb Bascand McKelvie accepted during the GFC to take that off their books and put it back in the system. So you ve seen the U.S. Fed has been chipping away at it, slowly shrinking their balance sheet. These are very positive signs. What I would say though is that we re starting we are in this business cycle at an elevated level of debt in total around the world. You know, there s a question of (a) who holds it and then (b) how much of it is there. So I would say that our monetary policy work we have to do is less. When you change the price of something that is a lot bigger, you get a bigger impact. And so, you know, there s been a real challenge around what is what we would have considered a neutral interest rate. Globally, it has come down because of those debt levels. So with the debt can I just follow up on that, if I may.] Some of the data there is going to be relatively readily available in terms of Europe and the United States. I m just have you got a comment on how visible the kind of financial stability of China is and in terms of knowing how much the debt is and where it is in that economy? As much as any international stats have. I ll say something very briefly and let Geoff think of something really wise to say. Something, very briefly, is that it is an incredibly well articulated and well understood story in China in large part because of the central command nature of the economy. And so it is understood, and there are many levers that are being used to effectively reduce that immediate inflation pressure. They are going through a miraculous long-term period of shifting out of low into middle and trying to push their way through into First World economic wealth. And you d have say in the long term they re well on the path for that. Well, maybe just to add that I think most analysts would tend to think that what looks like corporate debt has got a State guarantee or a complicit liability associated with it, and so we tend to group it together as a sort of Chinese Government debt standing behind it. The debt levels are high. There s been a lot in this shadow banking, shadow economy side. They have been working quite assiduously to improve the quality of some of that lending at the margin and putting rules around what can be lent by certain institutions to what sectors and so forth. So it really is the Governor saying the sort of tentacles of the Chinese State trying to manage the quality and the risk around that lending, but overall it s a higher level, it s a vulnerability, and it s one of those ones that almost an element of faith of how much do you believe that they can get it right, to manage that down or not. Just to go back to where you talked about elevated levels of debt. I just wonder what the tension in the reserve economy was to, I guess, take up a significant increase in interest and what work you do on that. That is right. That is a very important thing. We do two things at the bank, and one that gets more headlines than the other. The first is obviously the interest rates setting, but we re also we produce something called the Financial Stability Report, which, you re well aware of at this committee. And we have been talking and measuring and trying to really understand both the scale and the location and the vulnerabilities of debt in New 9

10 McKelvie Zealand, and we ve been very vocal around household lending and particularly to the investor part. So there have been very clear pockets of vulnerability for people who are highly leveraged in the housing market for investors; not so much owner- occupier but the investment side. Likewise in the agricultural sector and certainly amongst the dairy sector, there have been very high but again quite concentrated pockets of debt. A lot of farmers are debt-free, have been in the game long enough, but recent either conglomerations and / or recent farmers so it s the marginal investor in housing, it s the new homeowner, and it s some of these pockets of debt. We have to be very aware of just what is the impact of an interest rate change to that ongoing ability to spend and /or meet your levels. Monetary policy is a blunt tool. It s not the tool to really manage that. It s the other tools, the prudential tools we have around responsible lending: the LVR, the attestations from New Zealand bank directors that they are following the rule of law on consumer protection etc. So there s vulnerabilities without doubt. Just a very quick supplementary. So, ordinarily, inflation would drive land and house prices up. But given we ve had extraordinary inflation in house and land prices absent from any other inflation, is that an annual situation or a common event? It s not abnormal. I think it s one we talk about a lot at the bank, because with this hand, monetary policy, we re wanting people to spend more. Some will spend more through marginal increases in debt. With the other hand, we re saying those who have already got a lot, be careful. And so, you know, that is the challenge that we have. Monetary policy is a blunt tool. It s individual responsibility, bank responsibility, all of the other tools etc., to say, Beware if you cannot manage interest rates higher than this, then think hard. I just wanted to go back to the core decision. I don t want this to sound too much like criminologist to sort of read too much into individual words and the kind of animals on your tie that you re wearing today, but the language you ve used around the decision to stay at 1.75 is, you know, quite specific. You ve talked about us having accommodated policy for a considerable period of time. Is it fair and reasonable for people to read that as something of a shift in the bank s positioning on the length of time that you re prepared to hold to an accommodative-type of position? I think it is important that you re a criminologist. You know, those words are chosen incredibly deliberate to be as clear as we can, and it seems to have got through this time touch wood. And we ve seen the full yield curves ease back around the expectation of when our next move is that is still up according to market expectations. So they have to make a market. That s where they ve made it. But we are trying to make it very clear that at this point we re in no rush to be going either way. And as we put there as well, only time and events will tell. The good thing with monetary policy is you get to repeat the game. You can change the Governor, but you can repeat the game so, you know, as new events and new issues unfold. And 10

11 Yule we try to outline as much as we can the things we think that are important that might change us one way or t other. OK, I want to focus on the labour market a little bit in your policy statement, because you said you ve got a balanced risks and upside. And if you look at the really static rate of inflation and where you think the rates and if you look at international things that you look at, it s pretty stable. Yet it seems to me and you wrote this on table 1 With little slack left, capacity pressures building as demand growth etc. in the labour market. And then further on, on page 27, you say This potential this is the potential labour force This potential labour force has been elevated since 2010, but has recently fallen, suggesting little additional spare capacity. So my question in that context is: do you regard the labour market under the current local settings and international settings as being a major constraint for us to grow as we ve been growing in the last 5 years? Yes, with a bound of uncertainty around that. We ve got 4.4 percent unemployment, for example, as one indicator. We re projecting that to go lower. That is why we re saying that inflation pressures will start to rise, because these capacity levels are being reached. Where have we been surprised and where could we get it wrong? We will get it wrong. It s just hard to work out in which way. We could be surprised with even better labour force participation. There s been 360, ,000 saying that they are underemployed and they would like to work more, for example. Likewise, net immigration may remain more positive than what we ve got here. So we have been continuously surprised at the ability to create labour supply and for them to be absorbed, and they re being absorbed faster than they re being created. What we re saying is: where is this limit? And that s what we re prepared to try and find. In-between times, skills are changing, people are becoming mobile, investment s going on we don t want to be saying that s enough. In your opening comments, Governor, you talk about slowing population growth. Can you tell us the figures you ve got in mind for migration for the next 12 months and the next 24 months? We go from I think we had a net inflow of around 110,000. McDermott The last three years we had 177,000 and we ve got about 112,000 over the next three. And of the decline then, the difference, is that New Zealanders choosing to leave or declining interest, or A combination of both, but more about less arriving. And there s a nice graph in there with the actual numbers rather than Geoff and I trying to outguess each other. We can show it very clearly. So you ve got net inward migration slowing remaining positive but coming off quite quickly 2.7. So we ve got inward migration that comes down from 110,000 down to 11

12 Bascand [FTR finish time: 12:09:19] about 95,000. And likewise we ve got Kiwis departing going from 50,000 to 60,000. So the difference ends up being quite significant. Is that because of a potential change in Government policy or is what you re seeing without any change to currently? It s what we projected last time as well. It s a combination of both. It does have a provision or an allowance for the change in Government policy. Do you know what that policy is? It s continuing to be defined, I think, in terms of the details. So we ve really gone off the Government s policy statements of their and mandate and expectation, tougher visa requirements. So it s a judgment about how much that will impact it and we ve really allowed for about 20,000 to 30,000 over the period that sort of order of magnitude. So I m guessing and the remaining question is then where New Zealanders choose to go. Typically in the past they ve gone to Australia. Are you expecting the Australian economy to outperform New Zealand? The relative performance improvements for Australia in other words, we are staying at a solid performance. Australia is starting to pick up and improve, and that s that relative difference. Governor, I just want to round up with one final question. The bells have started ringing. It s slightly unusual one I won t spring one of these on you in the future, but given you re here with us for the first time and bearing in mind that you make your decisions within legislative boundaries and agreements and the boundaries of the agreement, it would be good for the committee just to hear a little bit from you about the kind of policies and values that you feel you will bring to the role that you re going to have some bearing on your decision-making functions that you have? I ll be very quick because I heard the bell saved by the bell! The main thing that I really want to do with the role is be a CEO more than a Governor, because this is a fantastic institution. We need to be able to make sure that it has a clear vision; it has the people and the processes operating most efficiently. I also want to expand the dialogue that comes from the bank, because as exciting as monetary policy is, there are equally if not more exciting prudential regulatory roles we play and the world of notes and coins and all of the excitement and challenges that are coming from that. These are really big parts of the business, which is why I emphasize the CEO rather than the Governor and the prudential regulation. For example, we are very, very in the face of insurance and banks at the moment around a whole series of issues. We need to speak out more about what those issues are. Otherwise the dialogue is filled in by them. OK, thank you. We appreciate that today. Thank you, committee. conclusion of evidence 12