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

Transcription

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

2 I.3D MONETARY POLICY STATEMENT, MAY 2018 Contents Recommendation... 3 Introduction... 3 Official cash rate unchanged... 3 Maximum sustainable employment levels... 3 Inflation developments... 4 Population growth is forecast to slow... 5 New Governor of the Reserve Bank s approach... 5 Appendix

3 MONETARY POLICY STATEMENT, MAY 2018 I.3D Reserve Bank of New Zealand, Monetary Policy Statement, May 2018 Recommendation The Finance and Expenditure Committee has examined the Monetary Policy Statement for May 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 10 May 2018, and the main issues we discussed in our subsequent meeting with the Governor of the Reserve Bank. Official cash rate unchanged The monetary policy statement announced that the Reserve Bank has left the official cash rate (OCR) unchanged at 1.75 percent. The governor s statement indicated that the OCR is likely to remain at 1.75 percent for some time to come. The Bank considers that the OCR s next shift could be either up or down, and that the chances of it moving either way are currently evenly balanced. Economic growth and employment in New Zealand are still strong, and near what the Bank considers their sustainable levels. However, consumers price index (CPI) inflation is below the 2 percent mid-point of the Bank s target range, which the Bank attributes in part to recent low food and import price inflation and subdued wage pressures. New Zealand has seen an unprecedented increase in employment, due in large part to an increased labour supply driven by women, older workers, and high net immigration. This has resulted in growth in demand for labour, goods, services, and accommodation. Global economic growth is forecast to continue supporting the demand for New Zealand s products and services. The Bank expects global inflation pressures to rise but remain contained. The Reserve Bank expects New Zealand s emerging capacity constraints to see New Zealand s CPI inflation gradually rise to its 2 percent annual target. The Bank believes that keeping the OCR at its current level for a considerable period of time is the best way to achieve its inflation target. Maximum sustainable employment levels Employment growth has exceeded labour force growth in recent years. This has resulted in the unemployment rate declining from over 6 percent in 2012 to 4.4 percent in the March 2018 quarter. The governor said that the growth in employment and the increase in labour force participation in New Zealand over recent years has been exceptional. Strong employment growth has been met with an equally strong labour supply. We heard that the 3

4 I.3D MONETARY POLICY STATEMENT, MAY 2018 Bank attributes the strong labour supply to people working longer in their careers, older workers returning to the labour force, more women entering and participating in the labour force, and high net immigration. In March 2018 the Minister of Finance and the incoming Governor of the Reserve Bank signed a new Policy Targets Agreement. In addition to requiring the Bank to conduct monetary policy so as to maintain a stable general level of prices, the new agreement has added a second objective. The Bank s conduct of monetary policy should now also contribute to supporting maximum sustainable employment within the economy. 1 Roughly, maximum sustainable employment refers to the highest levels of employment that can be sustained over time without placing significant upward pressure on inflation. The Bank notes that its thinking in this area is evolving, but the available evidence suggests that employment is currently around its maximum sustainable level. The governor said that he does not believe that monetary policy can influence sustainable employment to any large degree, but it can contribute to it. Maximum sustainable employment is determined by structural factors, such as the skill composition of the labour force, incentives to work, job mobility, and the ability of employers and job seekers to find one another. However, the Reserve Bank can contribute to the sustainable employment level by affecting the cyclical component of employment on the demand side. In effect, this means influencing the level and pace of spending in an economy. For example, if the labour market was well below sustainable employment, inflation would likely decline and unemployment would be likely to rise. The Reserve Bank could contribute by lowering interest rates and thus encouraging increased demand, which would see employment growth and inflation rise. The MPS notes that there is a high degree of uncertainty as to where the current level of employment stands in relation to its maximum sustainable level. This is because the maximum sustainable level of employment is not directly observable and changes over time. Because it is still learning how to measure and observe it, the Reserve Bank is using a wide range of indicators to gain a sense of what the maximum sustainable employment rate might be. Indicators include the number of people in work, the level of employment as a share of the working-age population, labour force participation, the unemployment rate, underutilisation, and the size of the potential labour force. Inflation developments Annual CPI inflation fell 0.5 percent to 1.1 percent in the March 2018 quarter. Tradables inflation has been volatile in recent years; it contributed to an increase in inflation to around 2 percent in 2017, and more recently it has driven inflation down. The Reserve Bank forecasts CPI inflation to average 1.4 percent over Core inflation has remained low, and is currently at 1.5 percent. The MPS suggests that low CPI inflation between 2012 and 2016 may still be forming part of price-setting decisions. It also suggests that technological developments and the globalisation of labour markets may 1 Policy Targets Agreement

5 MONETARY POLICY STATEMENT, MAY 2018 I.3D be suppressing prices. The Reserve Bank notes that there is considerable uncertainty around its assumptions about future price-setting behaviour. For this reason, it has listed price-setting behaviour as a key risk to the outlook for inflation. CPI inflation remaining below 2 percent We asked why CPI inflation has fallen, when recent monetary policy statements have forecast rises to 2 percent. We heard that short-term factors have recently affected CPI inflation. The Reserve Bank identified the removal of tertiary education fees for first-year students as a major factor, and said that it represented a 0.3 percent decrease. We heard that the impact of free tertiary education on inflation is expected to be temporary, and that the Bank does not consider such temporary changes when setting monetary policy. The governor acknowledged that CPI inflation has remained lower than the Reserve Bank s forecasts. Increasing capacity pressures in the economy should be pushing up inflation, but the Bank has been surprised by the lack of sustained wage inflation or passing-on of prices when margins are compressed. The governor attributed the dampening of wage inflation to the ongoing labour force participation rate and high numbers of new workers, and noted that many people are on fixed contracts. He said that New Zealand has record-high participation levels, and, given that you can t go north of 100 percent, the Bank expects the increasing pressure to mean that inflation rises to 2 percent by Population growth is forecast to slow The Reserve Bank expects population growth to slow, from a net inflow of about 177,000 in the last three years to 112,000 over the next three. The Bank forecasts that inward migration will slow from 110,000 over the last three years to 95,000 over the next three. Outward migration is also expected to affect net migration numbers; the Bank forecasts that 60,000 New Zealanders will leave over the next three years, compared with 50,000 who left in the last three. We heard that the Bank s forecasts are reached through a combination of analysing measured trends and making judgements based on the Government s policy statements. New Governor of the Reserve Bank s approach This hearing was the first time we had met with the new Governor of the Reserve Bank in his capacity as governor. We asked what policies and values he brings to the role, and how they might affect the Bank s decision-making functions. The governor told us that he intends to act more as a chief executive than a governor, ensuring that the Reserve Bank has a clear vision and people and processes that operate most efficiently. We heard that he wants to expand the Reserve Bank s communication regarding its other functions, particularly its prudential regulatory roles. The governor said that when the Reserve Bank is not vocal about issues in the financial sector, the banking and insurance operators fill in the dialogue. 5

6 I.3D MONETARY POLICY STATEMENT, MAY 2018 Appendix Committee procedure We met on 10 and 30 May 2018 to consider the Monetary Policy Statement, May 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 Ian McKelvie Willow-Jean Prime Dr Deborah Russell David Seymour Fletcher Tabuteau Dr Duncan Webb Lawrence Yule Transcript of hearing A transcript of our hearing with the Reserve Bank on 10 May 2018 is available on the Parliament website, 6