Monetary
Policy
Statement
August 2016

RESERVE BANK OF NEW ZEALAND/MONETARY POLICY STATEMENT, AUGUST 2016

i

 Policy Targets Agreement

world markets, changes in indirect taxes, significant government policy changes that directly affect
prices, or a natural disaster affecting a major part of the economy.

This agreement between the Minister of Finance and the Governor of the Reserve Bank of New
Zealand (the Bank) is made under section 9 of the Reserve Bank of New Zealand Act 1989 (the Act).
The Minister and the Governor agree as follows:

1. 

Price stability

a)   Under Section 8 of the Act the Reserve Bank is required to conduct monetary policy with the goal of
maintaining a stable general level of prices.

b)   The Government’s economic objective is to promote a growing, open and competitive economy as

the best means of delivering permanently higher incomes and living standards for New Zealanders.

2. 

Price stability plays an important part in supporting this objective.

Policy target

a)   In pursuing the objective of a stable general level of prices, the Bank shall monitor prices, including
asset prices, as measured by a range of price indices. The price stability target will be defined in
terms of the All Groups Consumers Price Index (CPI), as published by Statistics New Zealand.

b)   When disturbances of the kind described in clause 3(a) arise, the Bank will respond consistent with
meeting its medium-term target.

4. 
Communication, implementation and
accountability
a)   On occasions when the annual rate of inflation is outside the medium-term target range, or when

such occasions are projected, the Bank shall explain in Policy Statements made under section 15 of

the Act why such outcomes have occurred, or are projected to occur, and what measures it has taken,
or proposes to take, to ensure that inflation outcomes remain consistent with the medium-term
target.

b)   In pursuing its price stability objective, the Bank shall implement monetary policy in a sustainable,
consistent and transparent manner, have regard to the efficiency and soundness of the financial

system, and seek to avoid unnecessary instability in output, interest rates and the exchange rate.
c)   The Bank shall be fully accountable for its judgements and actions in implementing monetary policy.

b)   For the purpose of this agreement, the policy target shall be to keep future CPI inflation outcomes

between 1 per cent and 3 per cent on average over the medium term, with a focus on keeping future

3. 

average inflation near the 2 per cent target midpoint.

Inflation variations around target

a)   For a variety of reasons, the actual annual rate of CPI inflation will vary around the medium-term

trend of inflation, which is the focus of the policy target. Amongst these reasons, there is a range of
events whose impact would normally be temporary. Such events include, for example, shifts in the
aggregate price level as a result of exceptional movements in the prices of commodities traded in

ii

RESERVE BANK OF NEW ZEALAND/MONETARY POLICY STATEMENT, AUGUST 2016

 Monetary Policy Statement
August 2016

Projections finalised on 3 August 2016. Data finalised on 4 August 2016.
Policy assessment finalised on 10 August 2016.

Contents
1.  Policy assessment 

3

2.  Key policy judgements 

4

3.   International developments 

12

4.  Current domestic conditions 

16

5.  The macroeconomic outlook 

28

RESERVE BANK OF NEW ZEALAND/MONETARY POLICY STATEMENT, AUGUST 2016

1

 Report and supporting notes published at:
http://www.rbnz.govt.nz/monetary-policy/monetary-policystatement
Subscribe online: http://www.rbnz.govt.nz/email-updates
Copyright © 2016 Reserve Bank of New Zealand
This report is published pursuant to section 165A of the Reserve Bank of New
Zealand Act 1989.
ISSN 1770-4829

2

RESERVE BANK OF NEW ZEALAND/MONETARY POLICY STATEMENT, AUGUST 2016

 Chapter 1
Policy assessment
The Reserve Bank today reduced the Official Cash Rate (OCR) by 25
basis points to 2.0 percent.
Global growth is below trend despite being supported by unprecedented
levels of monetary stimulus. Significant surplus capacity remains across
many economies and, along with low commodity prices, is suppressing
global inflation. Some central banks have eased policy further since
the June Monetary Policy Statement, and long-term interest rates are
at record lows. The prospects for global growth and commodity prices
remain uncertain. Political risks are also heightened.
Weak global conditions and low interest rates relative to New Zealand
are placing upward pressure on the New Zealand dollar exchange rate.
The trade-weighted exchange rate is significantly higher than assumed in
the June Statement. The high exchange rate is adding further pressure
to the export and import-competing sectors and, together with low global
inflation, is causing negative inflation in the tradables sector. This makes
it difficult for the Bank to meet its inflation objective. A decline in the
exchange rate is needed.
Domestic growth is expected to remain supported by strong inward
migration, construction activity, tourism, and accommodative monetary
policy. However, low dairy prices are depressing incomes in the dairy
sector and reducing farm spending and investment. High net immigration
is supporting strong growth in labour supply and limiting wage pressure.

RESERVE BANK OF NEW ZEALAND/MONETARY POLICY STATEMENT, AUGUST 2016

House price inflation remains excessive and has become more broadbased across the regions, adding to concerns about financial stability.
The Bank is consulting on stronger macro-prudential measures that
should help to mitigate financial system risks arising from the rapid
escalation in house prices.
Headline inflation is being held below the target band by continuing
negative tradables inflation. Annual CPI inflation is expected to weaken in
the September quarter, reflecting lower fuel prices and cuts in ACC levies.
Annual inflation is expected to rise from the December quarter, reflecting
the policy stimulus to date, the strength of the domestic economy,
reduced drag from tradables inflation, and rising non-tradables inflation.
Although long-term inflation expectations are well-anchored at 2 percent,
the sustained weakness in headline inflation risks further declines in
inflation expectations.
Monetary policy will continue to be accommodative. Our current
projections and assumptions indicate that further policy easing will be
required to ensure that future inflation settles near the middle of the target
range. We will continue to watch closely the emerging economic data.
Graeme Wheeler

Governor
3

 Chapter 2
Key policy judgements
•  Weak global conditions continue to dampen inflationary pressure in
New Zealand, particularly as the elevated exchange rate and low import
prices depress tradables inflation.
•  The prolonged period of negative tradables inflation is driving low
headline inflation, and dragging on inflation expectations and the
outlook for inflation.

•  Monetary policy has provided significant stimulus to the economy in
response to the weak inflation outlook. However, additional monetary
stimulus is needed to help lower the exchange rate and to guard against
further declines in inflation expectations.

Weak global conditions are suppressing inflationary pressure in New
Zealand through a range of channels. Although global output is growing
at around average rates, it remains fragile and is being supported by
unprecedented monetary stimulus. Significant spare capacity remains,
and increased supply in key commodity markets has contributed to falls
in commodity prices over the past two years.
Relatively positive domestic growth prospects and low global interest
rates have resulted in strong investor appetite for New Zealand dollar
assets and an appreciation in the New Zealand dollar exchange rate
since the beginning of the year. The New Zealand dollar trade-weighted
index (TWI) is 6 percent higher than assumed in the June Statement.
The elevated exchange rate is reducing the competitiveness of exporters
and import-competing businesses, and weighing on tradables inflation.
Falling prices for New Zealand’s key commodity exports have caused a
significant decline in the terms of trade in recent years, despite declines
in import prices. Low global prices for dairy products have reduced farm
incomes and spending, and affected confidence, consumption, and
investment more broadly.
Declines in global commodity prices, subdued global inflation, and
the high exchange rate have translated into low import prices and

4

RESERVE BANK OF NEW ZEALAND/MONETARY POLICY STATEMENT, AUGUST 2016

 suppressed tradables inflation. Tradables inflation has been negative
since 2012.
Since mid-2014, negative tradables inflation has been driven partly by
sharp declines in oil prices. Falls across a range of commodity prices and
continued global spare capacity have seen prices of New Zealand’s other
imports also decline over the past year.
The current prolonged period of weakness in tradables inflation is
unusual historically (figure 2.1). In the past, sharp movements in
tradables inflation have tended to reflect transitory price movements,
such as volatile swings in global commodity prices and the exchange
rate. Consequently, monetary policy has typically been able to look
through these temporary movements in prices, focusing instead on the
medium-term trend in inflation.
Given the outlook for global inflation and policy rates, low tradables
inflation appears likely to continue for some time. This unusual
persistence in tradables inflation has contributed to low headline CPI
inflation, which is in turn seeping into inflation expectations, and presents
an ongoing challenge for monetary policy.
Inflation expectations seem to respond to the persistent component
of observed headline inflation. Low headline inflation, driven in part
by negative tradables inflation, has contributed to reduced inflation
expectations. Headline inflation is expected to remain weak in the near
term due to the appreciation of the TWI, renewed softness in fuel prices
in recent weeks, and further reductions in ACC motor vehicle levies.

Figure 2.1
Tradables inflation
(annual)

RESERVE BANK OF NEW ZEALAND/MONETARY POLICY STATEMENT, AUGUST 2016

%

8

6

6

4

4

2

2

0

0

−2
−4

−2
2000

2003

2006

2009

2012

2015

−4

Source: Statistics New Zealand.

Figure 2.2
Inflation expectations
(annual)
6

%

%

6

5

5
1−year

4

4

3

2−year

2

3
2

10−year

CPI
inflation

1
0

Short-term inflation expectations appear to have stabilised since March,
but there remains a risk of further declines in expectations stemming from
persistent low inflation (figure 2.2). A further sustained decline in inflation

%

8

2000

2003

2006

2009

2012

1
2015

0

Source: Statistics New Zealand, RBNZ estimates.
Note: Inflation expectations measures are estimates drawn at each time horizon from
the RBNZ inflation expectations curve.

5

 expectations would be concerning. Dampened wage- and price-setting
behaviour would weigh on future inflation, particularly over the time
horizon relevant for monetary policy, and would make it difficult to meet
the inflation target.
It is important to reduce the risk that long-term inflation expectations
fall further and become unanchored from the target midpoint. The
Bank judges that monetary policy will need to be more stimulatory than
projected in June (figure 2.3).
Continued low interest rates are expected to provide significant stimulus
to activity across the economy, increasing capacity pressure and
inflation. GDP growth is forecast to be 3.4 percent in each of the next two
years. As growth in productive capacity is forecast to be about
2.7 percent, this rate of GDP growth should see capacity pressure rise
and contribute to an increase in non-tradables inflation.
Low interest rates reduce the required rate of return on investment
and the cost of working capital, encouraging businesses to undertake
investment they may not have done otherwise. In an environment
of high net immigration and housing supply shortages, low interest
rates stimulate residential investment. In light of this, the projected
increase in capacity pressures reflects an increasing draw on
resources – particularly from construction activity.
Low interest rates also contribute to housing demand and rising
house prices, which have historically translated into increased private
consumption through a wealth effect. While this wealth effect may
be weaker in the current cycle, monetary stimulus is still expected to
generate stronger consumption. As activity increases, employment,
income, and confidence effects should also support household spending.

6

Figure 2.3
90-day interest rate
9

%

%
Projection

8

9
8

7

7

6

6

5

5

4

4

3

Jun MPS

2

2
Aug MPS

1
0

3

2000

2003

2006

2009

2012

2015

2018

1
0

Source: RBNZ estimates.

The Policy Targets Agreement (PTA) mandates the Bank to keep future
CPI inflation outcomes between 1 percent and 3 percent on average
over the medium term, with a focus on keeping future average inflation
near the 2 percent target midpoint. To move CPI inflation back within the
target band, additional monetary stimulus is needed. Nevertheless, there
is a risk that the additional monetary stimulus will intensify house price
inflation, which is already at high levels in several regions. The recently
proposed changes to macro-prudential policy should help to mitigate
the risks to financial stability stemming from high house prices and rapid
house price inflation.
This set of economic projections outlines the Bank’s plan for interest
rates to meet the requirements of the PTA. Our assessment of the
outlook and the appropriate policy response depends on several
judgements about how global conditions might evolve, and how the
domestic economy responds in this environment. If the assumptions

RESERVE BANK OF NEW ZEALAND/MONETARY POLICY STATEMENT, AUGUST 2016

 underpinning these projections prove to be inconsistent with incoming
data, the outlook for monetary policy will be revised. Two key
assumptions are that:

Figure 2.4
New Zealand dollar TWI
Index

%

82

• 

• 

global conditions improve, generating a modest depreciation in the
New Zealand dollar exchange rate; and
inflation expectations gradually increase and reduce their drag on
headline inflation.

The exchange rate
The New Zealand dollar TWI is assumed to depreciate gradually to about
73, as global conditions improve and policy rates overseas increase,
closing the differential between the return on New Zealand dollar and
foreign currency assets. However, if the outlook for global growth and
inflation remains weak, or deteriorates further, world interest rates may
remain lower for longer than is currently anticipated, maintaining or
increasing New Zealand’s interest rate differential. This could cause the
New Zealand dollar TWI to remain at elevated levels.
In the scenario presented in figure 2.4, the TWI is assumed to remain
at its current level throughout the projection due to weaker global
conditions. The higher exchange rate reduces the prices of imported
goods and services, directly lowering tradables inflation. The higher
exchange rate would also weigh on domestic activity through fewer
exports, and substitution of expenditure from domestically-produced to
imported goods. Additional monetary stimulus would be required to offset
the dampening impact on inflation (figure 2.5).

10

Projection

80

8

78

6

Scenario

76

4

Aug
MPS

74

2

72
70
68

0

Difference (RHS)

2010

2012

2014

2016

−2

2018

Source: RBNZ estimates.

Figure 2.5
90-day interest rate
4.0

%

%
Projection

4.0

3.5

3.5

3.0

3.0

2.5

2.5

2.0

Central

2.0

Inflation
expectations 1.5

1.5
1.0

1.0
Exchange rate

0.5

2010

2012

2014

2016

2018

0.5

Source: RBNZ estimates.

RESERVE BANK OF NEW ZEALAND/MONETARY POLICY STATEMENT, AUGUST 2016

7

 Inflation expectations
Short-term inflation expectations have fallen below the midpoint of the
target range following observed low headline inflation. Low inflation
expectations affect future inflation by dampening wage- and
price-setting behaviour, and by raising real interest rates, thereby
reducing the stimulus to the economy for a given level of nominal interest
rates. Short-term inflation expectations are assumed to gradually
increase over the projection as headline inflation increases.
Inflation expectations appear well-anchored. Long-term inflation
expectations continue to be close to 2 percent and are expected to
remain around this level.
The main risk to this assumption is that inflation expectations decline
further. Such a movement – particularly if long-term inflation expectations
were also affected – would be concerning and potentially costly to
reverse. If inflation expectations become unanchored, significantly lower
policy rates would be required to generate a strong enough output gap
(figure 2.6) and sufficient inflationary pressure to ensure inflation returns
to target.

8

Figure 2.6
Output gap
(share of potential output)
3

%

ppts
Projection

2

Scenario

1

0.8

Aug MPS

0.6

0
−1

0.4

Diff.
(RHS)

−2

0.2

−3
−4

1.0

2010

2012

2014

2016

2018

0.0

Source: RBNZ estimates.

RESERVE BANK OF NEW ZEALAND/MONETARY POLICY STATEMENT, AUGUST 2016

 Box A

Figure A.1
90-day interest rate

Recent monetary policy decisions
In recent years, global developments have been a dominant influence
on domestic inflationary pressure, and monetary policy decisions. The
Bank lowered the OCR by 100 basis points through 2015. Accounting
for the projected forward path of interest rates, the downward revision
was considerably larger – around 200 basis points – as the Bank
moved from a tightening to an easing bias (figure A.1). Global economic
conditions deteriorated, and the prices of New Zealand’s key export
commodities fell markedly. Despite import prices also declining, the
terms of trade fell, dampening confidence, and weighing on consumption
and investment. Weakness in global labour markets and relatively strong
labour market conditions in New Zealand contributed to strong levels of
net immigration, supporting rapid labour force growth and limiting the
increase in capacity pressure.
In March 2016, the Bank cut the OCR by a further 25 basis points.
Contributing to this decision was heightened volatility in financial markets
and a sharp fall in short-term inflation expectations.
Inflation expectations have remained stable since March, volatility in
financial markets has settled, and oil prices have increased from their
January low. However, improved risk appetite in financial markets and
a widening of New Zealand’s interest rate differential contributed to an
appreciation of the New Zealand dollar exchange rate. Domestically,
house price strength reasserted itself following some slowing through
the end of 2015, and broadened beyond Auckland. In response to these
developments, the Bank held the OCR at 2.25 percent at both the April
OCR Review and the June Statement, but retained its easing bias.

RESERVE BANK OF NEW ZEALAND/MONETARY POLICY STATEMENT, AUGUST 2016

9

%

%
Projection

9

8

8

7

7

6

6

5

Dec 14

4

4

Jun 15
3
Dec 15
Jun 16 2
Aug 16

3
2
1

5

2000

2003

2006

2009

2012

2015

2018

1

Source: RBNZ estimates.

Figure A.2
OCR and surprise measure
9

%

Basis points

20

8

Surprise (RHS)

10

7
0

6
5

−10

4
3
2

−20

OCR

2006

2008

2010

2012

2014

−30
2016

Source: RBNZ estimates.

9

 The forward path for interest rates presented by the Bank depends on
a set of assumptions. As these assumptions are updated, the monetary
policy stance can change. Central banks seek to be transparent in
signalling changes in monetary policy stance, but a degree of surprise
is not unusual around monetary policy decisions. This surprise element
tends to be greater in times of higher-than-normal uncertainty, or when
economic developments are evolving quickly.

10

Figure A.2 indicates that, in recent years, there has been a long period
of relative stability in the OCR and therefore little surprise associated
with monetary policy decisions. Over the past year, as uncertainty has
increased and the global outlook has deteriorated, and as the Bank has
sought to balance conflicting influences on the outlook for domestic
inflation, the frequency and magnitude of surprises from monetary
policy decisions have increased. This was also the case before and
immediately after the Global Financial Crisis.

RESERVE BANK OF NEW ZEALAND/MONETARY POLICY STATEMENT, AUGUST 2016

 Table 2.1
Key forecast variables

2014

2015

2016

2017

2018

2019

Mar
Jun
Sep
Dec
Mar
Jun
Sep
Dec
Mar
Jun
Sep
Dec
Mar
Jun
Sep
Dec
Mar
Jun
Sep
Dec
Mar
Jun
Sep

GDP growth
Quarterly
1.4
0.9
0.9
0.9
0.2
0.3
0.8
0.9
0.7
0.8
0.8
0.9
1.0
0.9
0.8
0.7
0.7
0.6
0.6
0.5
0.6
0.5
0.5

RESERVE BANK OF NEW ZEALAND/MONETARY POLICY STATEMENT, AUGUST 2016

CPI inflation
Quarterly
0.3
0.3
0.3
-0.2
-0.2
0.4
0.3
-0.5
0.2
0.4
0.1
0.3
0.2
0.6
0.5
0.2
0.4
0.6
0.6
0.3
0.5
0.6
0.7

CPI inflation
Annual
1.5
1.6
1.0
0.8
0.3
0.4
0.4
0.1
0.4
0.4
0.2
1.0
1.1
1.2
1.7
1.6
1.7
1.8
2.0
2.0
2.1
2.1
2.2

TWI
80.1
81.5
80.1
77.5
77.9
76.1
69.8
72.1
72.2
73.6
76.0
75.9
75.6
75.1
74.6
74.4
74.0
73.7
73.5
73.2
73.0
72.8
72.6

90-day
bank bill rate
3.0
3.4
3.7
3.7
3.6
3.5
3.0
2.8
2.6
2.4
2.3
2.1
2.0
1.8
1.8
1.8
1.8
1.8
1.8
1.8
1.8
1.8
1.8

11

 Chapter 3
International developments
•  Global economic activity has been subdued for some time, and output
remains below potential in many economies.

•  Internationally, inflation is low due to significant spare capacity in many
factor and product markets, and large falls in commodity prices.
•  Global activity is being supported by extraordinarily accommodative
monetary policy, which is expected to be supplemented by more
expansive fiscal policy in some countries. Global interest rates have
fallen to historic lows since the June Statement.

•  Subdued global conditions are suppressing inflation and activity in New
Zealand, especially through low import prices and the elevated New
Zealand dollar exchange rate.
•  Downside risks to the global growth outlook remain substantial.

12

Global economic conditions are fragile, with output below potential in
many economies. Inflation is low, and the prices of many commodities
have fallen sharply in recent years. Activity is being supported by
extraordinarily accommodative monetary policy and global interest rates
have fallen to historic lows. The protracted slowdown in economic growth
is creating structural challenges for the financial system and leaving
financial markets vulnerable to periodic bouts of volatility. In addition,
increased geopolitical tensions are creating further uncertainty about the
outlook.
The subdued global environment is causing very low inflation in New
Zealand. As discussed in chapter 4, low global inflation is suppressing
the prices of New Zealand’s imports, while low dairy prices are
dampening activity in the dairy sector. Furthermore, New Zealand’s
relatively positive growth outlook is contributing to the prices of New
Zealand dollar assets being inflated, in particular the value of the
exchange rate. The effects of the global economy on the outlook for New
Zealand are discussed further in chapter 5.

RESERVE BANK OF NEW ZEALAND/MONETARY POLICY STATEMENT, AUGUST 2016

 Figure 3.1
Advanced economy output gaps
(share of potential output)
4

%

Figure 3.2
Trading-partner growth
(annual)
%

4

15

3

3

12

2

2

1

1

Proj.

New Zealand

0
−1

−1

IMF advanced economies

−2
−3
−4

OECD economies

2000

2003

2006

0

2009

2012

2015

%
Projection

9

China

Asia ex−Japan
ex−China

6

6

3
0

−3

−3

−4

−6

15
12

9

−2

Source: Haver Analytics, RBNZ estimates.

%

3
Australia

0
−3

Other advanced economies

2000

2003

2006

2009

2012

2015

2018

−6

Source: Haver Analytics, RBNZ estimates.
Note: Asia ex-China ex-Japan includes Hong Kong, India, Indonesia, Malaysia, Singapore,
South Korea, Taiwan, Thailand, and the Philippines. Other advanced economies include
Canada, the euro area, Japan, the United Kingdom, and the United States.

Growth in advanced economies has been subdued since 2009. This
can be attributed in part to high debt levels and weak demand. Some
countries are also experiencing slowing growth in domestic demand due
to an aging population. Although an aggressive global monetary policy
response has increased activity and gradually eroded spare capacity,
output gaps in advanced economies are negative and are expected
to remain so over the forecast period (figure 3.1). In contrast, the New
Zealand economy is operating near capacity. This divergence has
created a tension between a weak global backdrop and relatively strong
domestic conditions.

outlook. However, the underlying pace of China’s growth appears to be
moderating and significant risks remain around the economic outlook.
The Australian economy is re-balancing away from mining investment,
and growth is continuing at a moderate pace. Growth in the United
Kingdom and the euro area are expected to be lower over the next
two years following the United Kingdom referendum result to leave the
European Union. The United States economy has made considerable
progress in reducing spare capacity.

Growth is expected to be subdued in most of New Zealand’s main trading
partners in 2016, with only a modest improvement in 2017 (figure 3.2).
Slowing world trade volumes are having a particular impact on
trade-sensitive economies in Asia and commodity-exporting economies.
In China, actions by policymakers are supporting the near-term growth

Global commodity prices have declined substantially over the past two
years (figure 3.3). In many commodity markets, supply remains high
despite low prices. Commodity prices troughed in January during a
period of heightened concerns about the outlook for global demand.
Prices are expected to remain low relative to levels seen in recent years.

RESERVE BANK OF NEW ZEALAND/MONETARY POLICY STATEMENT, AUGUST 2016

13

 Figure 3.3
Commodity prices

Figure 3.4
Trading-partner inflation
(annual)

Index

USD/barrel

130
120
110

Industrial metals

100

Agriculture

90
80

100

8

80

40

60
50

10

60

Brent crude oil
(RHS)

70

120

Bloomberg Index

14Q1

14Q3

15Q1

15Q3

16Q1

20

%
Projection

China

Australia

Asia ex−Japan
ex−China

10
8
6

4

4

2

2

0
−2

0

Other advanced
economies

2000

2003

2006

2009

2012

2015

2018

−2

Source: Bloomberg.

Source: Haver Analytics, RBNZ estimates.

Note: The Bloomberg Index and sub-components have been indexed
to 1 January 2014.

Note: Asia ex-China ex-Japan includes Hong Kong, India, Indonesia, Malaysia, Singapore, South
Korea, Taiwan, Thailand, and the Philippines. Other advanced economies include Canada, the
euro area, Japan, the United Kingdom, and the United States.

As a result of significant global spare capacity and low commodity
prices, trading-partner inflation is very low (figure 3.4). Headline
inflation is expected to increase over the next year as commodity prices
gradually increase and spare capacity is gradually eroded. Nonetheless,
underlying inflationary pressures are expected to remain benign.
Global growth is being supported by extraordinarily accommodative
monetary policy (figure 3.5). The Bank of England announced a large
stimulus package in August, cutting its policy rate to a historic low and
reviving its quantitative easing programme. The European Central
Bank is expected to take further steps to ensure that its asset purchase
programme continues to stimulate the euro area. The Reserve Bank of
Australia reduced its policy rate to a historic low in August. The one major
exception to the easing trend is the United States, where the Federal
Reserve is slowly withdrawing stimulus, but is proceeding with caution.
14

6

%

Figure 3.5
Central bank policy rates
5

%

%

5

4

4

Australia

3

3

2

2

1

Euro area
United Kingdom

United States

0
−1

1
0

2009

2010

2011

2012

2013

2014

2015

−1
2016

Source: Bloomberg.

RESERVE BANK OF NEW ZEALAND/MONETARY POLICY STATEMENT, AUGUST 2016

 Figure 3.6
10-year government bond yields
5

%

Figure 3.7
New Zealand dollar TWI
%

Index

Index

5

85

4

80

80

3

75

75

2

70

70

1

65

65

0

60

60

85

New Zealand

4
3

United States
Australia

2
Germany

1

United Kingdom

0
Japan

−1

2012

2013

2014

2015

−1
2016

Source: Bloomberg.

Monetary policy may be approaching its limits of effectiveness in some
economies, and therefore more expansive fiscal policy is expected. In
Japan, a major new fiscal package has been announced, and some
further monetary easing is anticipated.
Global interest rates have fallen to historically low levels since the June
Statement (figure 3.6). This is due to heightened global uncertainty,
downward revisions to the global growth outlook, and an expected
increase in monetary policy stimulus. Long-term interest rates have
become negative in many countries, such as Japan, Germany, and
Switzerland. In New Zealand, long-term interest rates have fallen along
with global rates, with the 10-year government bond yield reaching a
historic low of 2.2 percent at the end of July.
Against the backdrop of a weak global economy and low interest rates,
New Zealand dollar assets have proved attractive. This is reflected in a

RESERVE BANK OF NEW ZEALAND/MONETARY POLICY STATEMENT, AUGUST 2016

55

2006

2008

2010

2012

2014

55
2016

Source: Bloomberg.

strong share market, falling bond yields, and a high New Zealand dollar
exchange rate (figure 3.7). Since the June Statement, the New Zealand
dollar TWI has appreciated about 4 percent and appears elevated in
comparison to the level of New Zealand’s export commodity prices,
interest rate differentials, and relative economic activity.
Downside risks to the global growth outlook remain substantial. In many
economies, policy makers are challenged by a lack of policy space
should world growth slow further. The global financial system is being
challenged by low growth and interest rates. The market value of some
European banks has declined since June.
Geopolitical tensions are adding to global uncertainty. The United
Kingdom referendum result to leave the European Union has created
considerable uncertainty about political and economic outcomes.

15

 Chapter 4
Current domestic conditions
•  Continued weak global economic conditions have led to persistently weak
tradables inflation. Alongside below-average non-tradables inflation, this
has seen headline CPI inflation remain below the 1 to 3 percent target
range.
•  GDP growth is about average, supported by low interest rates, high
population growth, increasing residential investment, and strong tourist
spending. However, low export commodity prices continue to drag on
growth.
•  Spare capacity is being absorbed, with the output gap having increased
to about zero. In particular, capacity pressure is tightening in the
construction sector.

•  Short-term inflation expectations appear to have stabilised recently, but
remain well below 2015 levels and the 2 percent target midpoint.
Long-term inflation expectations remain near the target midpoint.

16

Imported inflation
Inflation has remained subdued in recent quarters, largely due to weak
global conditions, as discussed in chapter 3. Excess capacity has led to
low global inflation, directly reducing imported inflation. Central banks
have adopted highly accommodative monetary policy to stimulate their
economies, which has placed upward pressure on the New Zealand
dollar exchange rate and dampened tradables inflation (figure 4.1).
Annual tradables inflation has been negative since 2012, and declined to
-1.5 percent in the June quarter (figure 4.2). Fuel prices have fallen
9 percent over the past year, and currently subtract about 0.4 percentage
points from headline inflation. Fuel prices have softened again recently,
and this is expected to further lower tradables inflation in the September
quarter. Excluding the effects of vehicle fuel prices, which are typically
highly volatile, annual tradables inflation currently sits at -0.6 percent.

RESERVE BANK OF NEW ZEALAND/MONETARY POLICY STATEMENT, AUGUST 2016

 Figure 4.1
New Zealand dollar exchange rates
Rate

0.9

Figure 4.3
Mortgage interest rates
Index

90

NZD/USD

0.8

80

TWI
(RHS)

70

0.6

60
50

14Q3

%

7.5

7.0

15Q1

15Q3

40

16Q1

Source: Thompson Reuters, RBNZ.

7.0

Floating

3−year

6.5

5−year

6.0

6.0

5.5

5.5
1−year

5.0

NZD/GBP

0.5

14Q1

%

6.5

0.7

0.4

7.5

5.0

2−year

4.5
4.0

4.5
2012

2013

2014

2015

4.0
2016

Source: interest.co.nz, RBNZ estimates.
Note: Each rate shown is the average rate on offer from four banks:
ANZ, ASB, BNZ, and Westpac.

Domestic financial conditions

Figure 4.2
Components of tradables inflation
(annual)
40

%

%

8

30

6

Tradables (RHS)

20

4

10

2

Fuel

0

0

−10

−2

Tradables ex−fuel (RHS)

−20
−30

−4
2007

2009

2011

2013

2015

Source: Statistics New Zealand, RBNZ estimates.

RESERVE BANK OF NEW ZEALAND/MONETARY POLICY STATEMENT, AUGUST 2016

−6

In response to weak inflationary pressure, the Bank lowered the OCR
and has maintained an easing bias. Along with lower global interest
rates, this saw mortgage interest rates fall to record lows across all terms
in early 2016 (figure 4.3). Mortgage interest rates have remained broadly
stable in recent months.
Global funding markets have been relatively settled since March, despite
uncertainty related to the health of some European banks and the United
Kingdom referendum result to leave the European Union. Consistent with
this, the wedge between the OCR and our estimate of bank funding costs
has also been broadly stable since March (figure 4.4).
17

 Output growth

Figure 4.4
Banks’ marginal funding costs
6.0
5.5
5.0
4.5

%

%
Estimated weighted−average cost of new funding
Retail and corporate deposits
Foreign short−term wholesale
Foreign term wholesale
Domestic term wholesale
90−day interest rate
OCR

6.0
5.5
5.0
4.5

4.0

4.0

3.5

3.5

3.0

3.0

2.5

2.5

2.0

2012

2013

2014

2015

2.0
2016

Source: Bloomberg, RBNZ estimates.

Nevertheless, funding spreads remain wider than in 2013. Heightened
competition for stable sources of funding has seen interest rates on term
deposits remain elevated relative to equivalent wholesale funding rates.
For now, relative calm in markets has enabled banks to increase
long-term wholesale funding. However, if financial market volatility picks
up again, bank funding costs could increase and limit the pass-through of
OCR cuts to mortgage rates.

Low interest rates have helped to support growth, with the economy
expanding by 0.7 percent in the March quarter and 2.8 percent over
the year to March (figure 4.5). Growth was buoyed by high population
growth, increasing residential investment, and strong tourist spending.
Low export prices have seen the primary sector continue to drag on
growth. Recent indicators point toward strengthening growth, with
GDP growth expected to be around 0.8 percent in each of the next two
quarters.
Population growth is being driven by strong net immigration, due in
part to weak global economic activity and relatively favourable New
Zealand labour market conditions. Annual net permanent and long-term
immigration continues to reach new highs, adding 1.7 percent to the
working-age population in the year to June. Migration added 14,400
working-age people in the June quarter, down from a peak of 15,700 in
the December quarter (figure 4.6). The decline was primarily driven by
a fall in arrivals, particularly those from Asia and those on student visas
(figure 4.7).
Low mortgage interest rates, strong migration, and housing shortages in
parts of the country have placed continued upward pressure on house
prices (figure 4.8). House price inflation slowed in Auckland following the
introduction of tighter restrictions on loan-to-value ratios and changes to
government policy in late 2015. Annual house price inflation in Auckland
has stabilised at around 12 percent, but prices have increased by more
than 6 percent over the June quarter. Outside Auckland and Canterbury,
annual house price inflation has continued to increase since early 2015,
reaching 18 percent in June.

18

RESERVE BANK OF NEW ZEALAND/MONETARY POLICY STATEMENT, AUGUST 2016

 Figure 4.5
GDP growth
(s.a.)

Figure 4.7
Migrant arrivals by visa type
(quarterly, s.a.)

%

%

2.0

5

1.5

4
3

000s

15

12

12

Work and residency

1.0

2

0.5

1
0

0.0

Quarterly (RHS)

−1

9

9

6

6

No visa

−0.5

−2

Annual

−3
−4

000s

15

2005

2007

2009

−1.0
2011

2013

−1.5

2015

3
0

3

Student

2005

Source: Statistics New Zealand, RBNZ estimates.

2007

2009

2011

2013

2015

0

Source: Statistics New Zealand, RBNZ estimates.
Note: The data shown are for permanent and long-term migration.

Figure 4.6
Migration
(quarterly, s.a.)
000s

Figure 4.8
House price inflation
(annual, 3-month moving average)

000s

30

20
30
15

25

10
20

Arrivals

5
15
Departures

10

2000

2003

2006

0

Net
(RHS)

2009

2012

%

30

25

Canterbury

Auckland

20

2015

Note: The data shown are for permanent and long-term working-age migration.

25
20

15

15

10

10

5

5

0

0

−5
−5

Source: Statistics New Zealand, RBNZ estimates.

RESERVE BANK OF NEW ZEALAND/MONETARY POLICY STATEMENT, AUGUST 2016

%

Rest of New Zealand

−10
−15

−5
−10

2000

2003

2006

2009

2012

2015

−15

Source: REINZ, RBNZ estimates.

19

 Figure 4.9
Residential investment and building consents
(investment as a share of potential output)
Number

Figure 4.11
Consumption growth
(annual)

%

3000

8.0
7.5

2500

2000

Residential
consents

1000

2003

2006

2009

2012

2015

4

6.0

2

2

0

0

4.5

−2

4.0

−4

−2
2000 2002 2004 2006 2008 2010 2012 2014

−4

Source: Statistics New Zealand.

Figure 4.10
Residential building consents by region
(3-month moving average, s.a.)

Rising house prices, sustained high population growth, and low interest
rates have supported residential investment, which increased by
4.2 percent in the March quarter. Strong consent issuance in recent
months points towards further growth in residential investment over 2016
(figure 4.9). Outside of Auckland, strength in residential investment has
been broad based, with building consents increasing across most regions
in the June quarter (figure 4.10). Building consent issuance in Auckland
may increase further if changes to the Auckland Unitary Plan permit
more responsive supply. The central government recently announced a
$1 billion fund to assist housing infrastructure development by regional
councils, which could boost construction further.

Number

Number

1500

1200

1200
Rest of
New Zealand

900

900

600

600
Auckland

300

2000

2003

2006

2009

Canterbury

2012

Source: Statistics New Zealand, RBNZ estimates.

20

4

Source: Statistics New Zealand, RBNZ estimates.

1500

0

8

6.5

5.0

2000

%

6

5.5

1500

%

6

7.0
Residential investment
(RHS)

8

2015

300
0

Market non-residential investment grew by 1.2 percent in the year
to March. Market non-residential consent issuance has increased in
Auckland over this period, but trended lower across the rest of New
Zealand.

RESERVE BANK OF NEW ZEALAND/MONETARY POLICY STATEMENT, AUGUST 2016

 Figure 4.12
Short-term arrivals and real exports of travel services
(quarterly, s.a.)
$m

000s

3200

900

3000

800

Short−term arrivals
(RHS)

2800

700

2600
2400

600

2200

Real exports
of travel services

2000
1800

2000

2003

2006

2009

500

2012

2015

400

Source: Statistics New Zealand, RBNZ estimates.

Figure 4.13
Commodity prices
(SDR, s.a.)
Index

Index

450

450

Dairy

400

400

350

350

300

300

250

Meat, pelts,
and wool

200
150
100
50

Aggregate

250
200
150

Forestry

100

50
2000 2002 2004 2006 2008 2010 2012 2014 2016
Source: ANZ, RBNZ estimates.

RESERVE BANK OF NEW ZEALAND/MONETARY POLICY STATEMENT, AUGUST 2016

Strong population growth has also supported domestic activity by
increasing consumption. Nevertheless, consumption growth has only
been around average in recent years (figure 4.11). This partly reflects
that low export prices and weak consumer confidence have dragged on
consumption, despite increasing household wealth and relatively strong
growth in real labour incomes.
Strong tourist spending continues to support domestic growth. Visitor
arrivals increased by 9 percent in the year to June (figure 4.12), reaching
3.3 million on an annual basis. Arrivals from most regions have increased
in recent years, particularly from Asia and Australia. Average expenditure
per visitor has declined over the past two quarters, but total visitor
spending has remained stable at a high level. Tourist spending may come
under pressure if the New Zealand dollar remains elevated.
Weak global conditions have resulted in international prices for New
Zealand’s commodity exports remaining low, dragging on GDP growth.
In saying this, the ANZ commodity price index has shown some signs
of improvement recently, increasing by 5 percent since January (figure
4.13). Increases were led by prices of meat, pelts, and wool, which were
up 12 percent.
Dairy prices have also increased in recent months, but remain low
relative to levels seen in recent years. Whole milk powder prices on the
Global Dairy Trade platform are currently at USD 2,265 per tonne, still
more than 50 percent below early-2014 levels. Low prices reflect both
weak global dairy demand and continued elevated supply, particularly out
of Europe (see box B).
In response to sustained low prices, dairy farmers have cut back on
feed and maintenance expenditures. Reduced expenditure on feed
is expected to weigh on milk production, while reduced spending on
21

 repairs and maintenance will affect activity for rural service providers
and retailers. This will likely suppress consumer spending in rural areas.
Farm investment has also declined, and intentions to invest over the next
12 months remain well below average.
Low export prices also weigh on broader business confidence. This
has contributed to business investment remaining flat over the past
year. However, business confidence has improved more recently, and
business investment is expected to increase by 6 percent through 2016.

Capacity pressure

Figure 4.14
Labour force and employment growth
(annual)
%

5

%

5

4

4

3

3

Labour
force

2

2

1

1

0

0

−1

−1

Employment

−2
−3

−2
2000

2003

2006

2009

2012

2015

−3

Source: Statistics New Zealand, RBNZ estimates.

Revisions to official labour market statistics saw the March quarter
unemployment rate revised down by 0.5 percentage points.1 The
unemployment rate is estimated to have remained stable at 5.2 percent
in the June quarter. Labour market conditions have improved over the
past year, with estimated employment growth of 2.1 percent (figure
4.14). However, the associated tightening in capacity pressure has been
slowed by strong population growth, which has contributed to estimated
labour force growth of 1.7 percent.
Other indicators also suggest the output gap is gradually increasing.
A wide range of indicators of capacity pressure lifted in the June
Quarterly Survey of Business Opinion, across industries and regions.
Capacity pressure is particularly tight in the construction industry, with
an increasing share of firms reporting difficulty finding skilled labour. The
1 

These revisions are the result of the redevelopment of the Household Labour Force Survey. For
more detail see http://www.stats.govt.nz/browse_for_stats/income-and-work/employment_and_
unemployment/improving-labour-market-statistics/hlfs-revisions-key-labour-est.aspx

22

Figure 4.15
Output gap and indicator range
(share of potential output)
5

%

%

5

4

4

3

3

2

2

1

1

0

0

−1

−1

−2

−2

−3

−3

−4

−4

−5

−5

−6

2000

2003

2006

2009

2012

2015

−6

Source: RBNZ estimates.
Note: Shaded area indicates range between maximum and minimum values
from a suite of indicators of the output gap.

RESERVE BANK OF NEW ZEALAND/MONETARY POLICY STATEMENT, AUGUST 2016

 output gap is estimated to be currently about zero, near the middle of the
range implied by a suite of indicators (figure 4.15).

Pricing and inflation

Figure 4.16
Housing-related consumer price inflation
(annual)
8

%

%

8

7

7
Construction costs
(excluding land)

6

Despite capacity pressure gradually increasing, non-tradables inflation
remains below average. Annual non-tradables inflation increased to
1.8 percent in the June quarter, from 1.6 percent in the March quarter.
Inflationary pressures were most pronounced for housing-related
components (figure 4.16), which contributed 1.4 percentage points to
non-tradables inflation and 0.8 percentage points to headline inflation.
Construction costs increased by 5.6 percent nationwide and 7.6 percent
in Auckland over the past year.
Annual non-tradables inflation continues to be dampened by price
declines of specific components. For example, despite constituting only
a small share of the non-tradables basket, a significant reduction in ACC
motor vehicle levies in July 2015 is estimated to be currently subtracting
0.6 percentage points from annual non-tradables inflation. ACC motor
vehicle levies were further reduced in July 2016, and this will detract from
non-tradables inflation.
The combination of persistently negative tradables inflation and
below-average non-tradables inflation has seen annual headline inflation
remain low at 0.4 percent in the June 2016 quarter (figure 4.17). In the
September quarter, annual CPI inflation is expected to decline to
0.2 percent, due to the recent fall in fuel prices.

RESERVE BANK OF NEW ZEALAND/MONETARY POLICY STATEMENT, AUGUST 2016

6

5

5

4

4

3

3
Housing and
household utilities

2
1
0

2
1

2005

2007

2009

2011

2013

2015

0

Source: Statistics New Zealand.

Figure 4.17
CPI inflation
(annual)
8

%

%

8

6

6

4

Non−tradables

2

2

0

0

Headline

−2
−4

4

−2

Tradables

2005

2007

2009

2011

2013

2015

−4

Source: Statistics New Zealand, RBNZ estimates.

23

 Figure 4.18
Inflation expectations curve
(annual, by number of years ahead)
4

%

Figure 4.19
Core inflation measures
(annual)

%

4

3

6

%

6

5

3

5
Sectoral factor
model

4

Perceived target
focus
2
Aug
MPS

%

Dec MPS

2

3

Jun MPS

1

0

1

2

3

4

5

6

7

8

9

10

0

0

Horizon (years)
Source: ANZ Bank, Aon Hewitt, Consensus Economics, RBNZ estimates.

Note: The perceived target focus is where the inflation expectations curve trends towards in
the long run. The dotted grey lines reflect a band that is close to the perceived target focus
(calculated as +/-1 standard deviation of the perceived target focus since the 2012 PTA).

Weak headline inflation, driven in large part by negative tradables
inflation, has contributed to a decline in short-term inflation expectations.
While short-term inflation expectations have stabilised recently, they
remain well below 2015 levels and below the 2 percent target midpoint
(figure 4.18). Expectations falling further would be of concern given
their influence on the wage- and price-setting behaviour of firms
and businesses, and thereby inflation outcomes. Long-term inflation
expectations have remained broadly stable, anchored near the 2 percent
target midpoint.

2000

2003

2006

2009

1
2012

2015

0

Source: Statistics New Zealand, RBNZ estimates.

Given the significant influences of temporary and sector-specific price
movements on headline CPI inflation, measures of core inflation can
be useful in assessing the strength of underlying inflationary pressure.
Based on the sectoral factor model, core inflation has trended higher
since the start of 2015, to be at 1.6 percent in the June quarter (figure
4.19).2 Given the uncertainty in estimating core inflation, the Bank also
monitors a range of other measures. These all remained broadly stable
or increased in the June quarter, and currently range from 1.0 to
1.7 percent.

2 

24

2

CPI
ex−food
and energy

1

4
3

Weighted
median

Factor
model

2

1

Trimmed mean
(30 percent)

The Bank has, over recent years, paid the most attention to the sectoral factor model as a measure of
core inflation. Given the uncertainty of measuring core inflation, the Bank does not rely on any single
measure, and the measure that is used the most is under constant evaluation. For a discussion of the
most recent evaluation, see Wong, B., and G, Kamber (forthcoming) ‘Testing an Interpretation of Core
Inflation Measures in New Zealand’, Reserve Bank Analytical Note Series.

RESERVE BANK OF NEW ZEALAND/MONETARY POLICY STATEMENT, AUGUST 2016

 Box B
Global dairy supply developments

Figure B.1
Global liquid milk production
(annual total)
Million tonnes

Million tonnes

160

Global dairy prices have fallen substantially since their 2014 peak. While
this partly reflects a range of demand-side factors, such as weak demand
from China and Russia’s import ban on European Union dairy products,
increases in global supply have also been an important contributing
factor. Global milk production has increased significantly since the early
1990s (figure B.1). This box provides an overview of developments in
global dairy supply in recent years, and discusses their implications for
our medium-term outlook.

140

Production growth throughout the 2000s was also supported by rapid
growth in Chinese milk output. Between 2000 and 2008, Chinese milk
production almost quadrupled, increasing by more than the equivalent of
New Zealand’s annual dairy output. This growth was primarily achieved
by increasing cow numbers, although yield per cow also rose by about a
third. While milk production stalled following the melamine contamination
in 2008, it has since trended upward, and recent structural developments
in the Chinese dairy industry suggest potential for significant future
production growth.

RESERVE BANK OF NEW ZEALAND/MONETARY POLICY STATEMENT, AUGUST 2016

140

120

120

100

100

Other

80

80

60

60

United States

40

40

China

20
0

Global production growth has been supported by a gradual increase
in United States production, driven by a move to larger, more efficient
farms. The mean number of cows per farm in the United States was
61 in 1992; this had increased to 144 by 2012. Over this time, average
milk production per cow also increased. This occurred as government
support for the industry was gradually removed, suggesting that the trend
increase is sustainable.

160

EU−28

New Zealand

1993

1996

1999

2002

2005

2008

2011

2014

20
0

Source: CLAL, Eurostat, Haver Analytics, USDA, RBNZ estimates.
Note: Other includes Argentina, Australia, Belarus, Brazil, Chile,
Japan, Russia, and Ukraine.

Since 2008, increases in global milk production have been driven to a
large extent by Europe. European production had been constrained by
quotas for several decades, but their relaxation and eventual removal
has seen production surge more recently (figure B.2). Increases in milk
production have been supported by continued growth in yield per cow,
enabled by industry consolidation and specialisation, and a stabilisation
in cow numbers. Industry consolidation is likely to continue, given the
relatively small average size of European dairy farms at present. This
would promote further efficiency gains and support dairy production in
the future.
Given these trends, global production is likely to remain structurally
higher than previously thought. While demand for dairy products is
expected to be supported in the long term by growth in emerging

25

 Figure B.2
European milk deliveries
(3-month moving average, s.a.)
Million tonnes

Million tonnes

13.5

Quotas
increased

Quotas
removed

13.5

13.0

13.0

12.5

12.5

12.0

12.0

11.5

11.5

11.0

1991

1995

1999

2003

2007

2011

2015

markets, high global production is likely to weigh on prices in the medium
term. These factors have led the Bank to revise down its medium-term
assumption for whole milk powder prices from USD 3,300 per tonne
to USD 3,000 per tonne (see chapter 5). This is consistent with recent
downward revisions by external agencies, such as the OECD-FAO.

11.0

Source: Eurostat, RBNZ estimates.
Note: Includes milk deliveries for countries that were not in the
European Union for the whole period, to allow comparability.

26

RESERVE BANK OF NEW ZEALAND/MONETARY POLICY STATEMENT, AUGUST 2016

 Table 4.1
Measures of inflation, inflation expectations, and asset prices

Inflation (annual rates)
CPI
CPI non-tradables
CPI tradables
Sectoral factor model estimate of core inflation
CPI trimmed mean (30 percent)
CPI weighted median
GDP deflator (expenditure)

2014
Dec

Mar

Jun

0.8
2.4
-1.3
1.3
0.9
1.5
-2.2

0.3
2.4
-2.4
1.3
1.0
1.7
-0.8

2015

2016
Jun

Sep

Dec

Mar

0.4
2.1
-1.8
1.4
0.8
1.3
0.5

0.4
1.5
-1.2
1.5
1.0
1.5
0.8

0.1
1.8
-2.1
1.5
0.8
1.5
0.3

0.4
1.6
-1.2
1.6
1.1
1.5
1.2

0.4
1.8
-1.5
1.6
1.2
1.7

Sep

Inflation expectations
ANZ Business Outlook - inflation one year ahead (quarterly
average to date)
RBNZ Survey of Expectations - inflation two years ahead
Aon Hewitt Economists’ Survey - inflation four years ahead
Aon Hewitt Economists’ Survey - inflation seven years ahead
Long-run inflation expectations 1

2.3

1.7

1.7

1.7

1.7

1.4

1.4

1.5

2.1
2.2
2.2
2.1

1.8
2.1
2.2
2.1

1.9
2.1
2.2
2.1

1.9
2.2
2.2
2.1

1.9
2.1
2.2
2.1

1.6
2.0
2.1
2.0

1.6
1.9
2.0
2.0

1.7

Asset prices (annual percent changes)
Quarterly house price index (CoreLogic)
REINZ Farm Price Index (quarterly average to date)
NZX 50 (quarterly average to date)

6.4
1.2
12.6

9.0
2.0
16.5

11.1
2.1
12.6

14.9
-0.4
11.4

11.2
-2.5
10.8

11.0
4.2
9.1

-2.6
18.4

1 

1.9

21.1

Long-run expectations are extracted from a range of surveys using a Nelson-Siegel model. Source: ANZ Bank, Aon Consulting, Consensus Economics, RBNZ estimates.

RESERVE BANK OF NEW ZEALAND/MONETARY POLICY STATEMENT, AUGUST 2016

27

 Chapter 5
The macroeconomic outlook
•  Global conditions remain fragile and continue to weigh on the outlook
for domestic inflationary pressures.
•   Since the June Statement, an appreciation of the New Zealand dollar
has dampened the outlook for inflationary pressure, and short-term
inflation expectations remain low.

•  A lower projected path for interest rates will help ensure that inflation
settles near the middle of the target range.
•  Low interest rates are expected to contribute to capacity pressures
through several channels, such as residential investment, business
investment, and consumption.

As discussed in chapter 3, the outlook for trading-partner growth remains
fragile. Global commodity prices are lower than they were a few years
ago, and inflation in most advanced economies is below central banks’
targets. Consequently, central bank policy rates are historically low, and
are expected to remain stimulatory.
Fragile global conditions and resultant weak inflationary pressures affect
the New Zealand economy in several ways. Low global interest rates
relative to those in New Zealand have contributed to continued strength
in the New Zealand dollar TWI (figure 5.1). The TWI is currently around
6 percent higher than assumed in the June Statement. Over the medium
term, the exchange rate is assumed to depreciate, reflecting a gradual
improvement in global economic conditions, and a narrowing in interest
rate differentials between New Zealand and other advanced economies.
Weak global demand and ongoing strong supply in some markets
are expected to weigh on the prices of New Zealand’s commodity
exports (figure 5.2). The medium-term outlook for dairy prices has been
revised lower. Overall, export prices are expected to remain below their
2013-2014 average level and continue to dampen domestic incomes,
confidence, and spending. Weak external demand, together with the
higher exchange rate, continues to exert pressure on the agriculture

28

RESERVE BANK OF NEW ZEALAND/MONETARY POLICY STATEMENT, AUGUST 2016

 Figure 5.1
New Zealand dollar TWI
Index

Figure 5.3
Import prices
(world terms, s.a.)
Index

Index

Index

85

1.30

80

1.25

1.25

75

1.20

1.20

70

1.15

1.15

65

65

1.10

1.10

60

60

1.05

1.05

55

55

1.00

1.00

50

0.95

85

Projection

80
Aug MPS

75
70

50

Jun MPS

2000

2003

2006

2009

2012

2015

2018

Source: RBNZ estimates.

Index

Index
Projection

1.8

1.9
1.8

1.7

1.7

1.6

1.6

1.5

1.5

1.4

1.4

1.3

1.3

1.2

1.2

1.1

1.1
2003

2006

2009

2012

2003

2006

2009

2012

2015

2018

0.95

sector and other export-dependent sectors, with flow-on effects to the
wider economy.

1.9

2000

2000

1.30

Source: Statistics New Zealand, RBNZ estimates.

Figure 5.2
Export prices
(world terms, s.a.)

1.0

Projection

2015

Source: Statistics New Zealand, RBNZ estimates.

RESERVE BANK OF NEW ZEALAND/MONETARY POLICY STATEMENT, AUGUST 2016

2018

1.0

Low commodity prices and continued low global inflation are also
expected to hold down the prices of New Zealand’s imports (figure 5.3).
The price of Dubai crude oil is assumed to remain low in the second half
of 2016, and increase only gradually to USD 55 per barrel by the end of
the projection period.
Low import prices, in conjunction with the high exchange rate, imply
continued low tradables inflation (figure 5.4). As discussed in chapter
4, tradables inflation is expected to remain depressed in the near term
due to recent declines in fuel prices. Over the medium term, tradables
inflation is expected to increase gradually, in part supported by the
exchange rate depreciating from its current level.

29

 Figure 5.4
Tradables inflation
(annual)
%

8

%
Projection

8

6

6

4

4

2

Jun MPS 2

0

0

−2
−4

Aug MPS −2

2000

2003

2006

2009

2012

2015

2018

Net immigration is projected to remain elevated, due to favourable labour
market conditions in New Zealand relative to overseas, and will support
domestic demand (figure 5.5). As noted in chapter 4, net immigration also
adds to labour force growth and moderates wage inflation.
Survey measures of inflation expectations appear to have stabilised, but
are at a lower level than in 2015. Low inflation expectations are expected
to influence future inflation via wage- and price-setting behaviour and
reduce the degree of real stimulus delivered to the economy for a given
level of nominal interest rates. Inflation expectations are projected to
recover gradually as CPI inflation increases towards the midpoint of the
target band.

−4

The 90-day interest rate has declined over the past 12 months and is
projected to ease further (figure 5.6). This additional monetary policy
stimulus is judged necessary to guard against further falls in inflation

Source: Statistics New Zealand, RBNZ estimates.

Figure 5.5
Migration
(quarterly, s.a.)

Figure 5.6
90-day interest rate

000s

000s

30

Projection

20

9
15

25

10
20

Arrivals

5
15
Departures

10

2000

2003

2006

0

Net
(RHS)

2009

2012

%
Projection

8

2015

2018

Note: The data shown are for permanent and long-term working-age migration.

9
8

7

7

6

6

5

5

4

4

3

Jun MPS

2
−5

Source: Statistics New Zealand, RBNZ estimates.

30

%

2
Aug MPS

1
0

3

2000

2003

2006

2009

2012

2015

2018

1
0

Source: RBNZ estimates.

RESERVE BANK OF NEW ZEALAND/MONETARY POLICY STATEMENT, AUGUST 2016

 Figure 5.7
Residential investment
(share of potential output)
8.0

Figure 5.8
Business investment growth
(annual)

%

%
Projection

7.5

Aug MPS

8.0

7.0

6.5

Jun MPS 6.5

6.0

6.0

5.5

5.5

5.0

5.0

4.5

4.5
2000

2003

2006

2009

2012

2015

2018

4.0

Source: Statistics New Zealand, RBNZ estimates.

expectations, and to ensure that future average inflation settles near the
middle of the target range. This flows through to the broader economy
through many channels.
Construction activity is an important source of output growth and capacity
pressure over the projection. The increase in residential investment is
expected to be larger and more sustained than in the June Statement
(figure 5.7). This increase is underpinned by the existing housing
shortage, strong population growth, high house prices, and low interest
rates.
Non-residential construction is also projected to increase in response to
lower interest rates. Furthermore, rising capacity pressure and improving
business confidence are expected to support a recovery in business
investment more widely, despite the subdued outlook for rural investment
as a result of low commodity prices (figure 5.8).

RESERVE BANK OF NEW ZEALAND/MONETARY POLICY STATEMENT, AUGUST 2016

%

%
Projection

30

7.5

7.0

4.0

30
20

20

10

10

0

0

−10
−20

−10

2000

2003

2006

2009

2012

2015

2018

−20

Source: Statistics New Zealand, RBNZ estimates.

Strong net immigration, low interest rates, and a shortage of housing in
Auckland are expected to keep house price inflation elevated
(figure 5.9). House price inflation moderates in the second half of the
projection horizon as elevated residential construction begins to address
the housing shortage, net immigration moderates, and affordability
constraints begin to bind.
Consumption growth is expected to strengthen, supported by
stimulatory interest rates, strong population growth, rising real wages,
and increasing household wealth (figure 5.10). Subdued export prices
may continue to dampen consumption, particularly in rural areas.
Given increasing domestic demand, capacity pressures are projected to
increase (figure 5.11). The economy is projected to expand by
3.4 percent in each of the next two years. The rate of potential growth
is expected to remain near 2.7 percent, supported by strong growth in
31

 Figure 5.11
Output gap
(share of potential output)

Figure 5.9
House price inflation
(annual)
25

%

%
Projection

25

20

20

15

15

10

10

5

5

0
−5
−10

2000

2003

2006

2009

2012

2015

2018

%

4

%

3

3

2

2

1

1

0

0

−1

−1

0

−2

−2

−5

−3

−3

−10

−4

2000

2003

Figure 5.10
Consumption growth
(annual)
%
Projection

6

4

4

2

2

0

0

−2

−2

−4

−4

2006

2009

2012

2015

Source: Statistics New Zealand, RBNZ estimates.

32

8

6

2003

2009

2012

2015

−4

2018

Figure 5.12
Non-tradables inflation
(annual)

%

2000

2006

Source: RBNZ estimates.

Source: CoreLogic, RBNZ estimates.

8

4

Projection

2018

5.5

%

%
Projection

5.0

5.5
5.0

4.5

4.5

4.0

4.0

3.5

3.5

3.0

3.0

2.5

2.5

2.0

2.0

1.5

1.5

1.0

2000

2003

2006

2009

2012

2015

2018

1.0

Source: Statistics New Zealand, RBNZ estimates.

RESERVE BANK OF NEW ZEALAND/MONETARY POLICY STATEMENT, AUGUST 2016

 labour supply. As capacity pressure increases, annual non-tradables
inflation is expected to rise throughout the projection (figure 5.12).
Annual CPI inflation is projected to return to about the middle of the target
range in mid-2018 (figure 5.13).

Figure 5.13
CPI inflation
(annual)
6

%

%
Projection

6

5

5

4

4

3

3

2

2

1

1

0

2000

2003

2006

2009

2012

2015

2018

0

Source: Statistics New Zealand, RBNZ estimates.

RESERVE BANK OF NEW ZEALAND/MONETARY POLICY STATEMENT, AUGUST 2016

33

 Table 5.1
Composition of real GDP growth
(annual average percent change, seasonally adjusted, unless specified otherwise)
March year

2009

2010

2011

Actuals
2012

2013

2014

2015

2016

Projections
2017
2018 2019

Final consumption expenditure
Private
Public authority
Total

-0.8
3.9
0.4

1.5
-0.5
1.0

2.3
1.9
2.2

3.2
1.7
2.9

2.4
-0.1
1.8

3.1
2.3
2.9

2.6
2.3
2.6

2.5
1.8
2.3

3.4
1.8
3.0

3.6
1.7
3.2

2.9
0.8
2.4

Gross fixed capital formation
Residential
Other
Total

-21.2
-2.3
-7.3

-9.0
-10.5
-10.2

1.6
4.3
3.7

3.0
6.8
6.0

15.3
3.0
5.7

13.0
5.5
7.2

11.6
9.0
9.6

5.6
1.3
2.4

12.7
4.0
6.3

6.4
7.1
6.9

1.6
3.2
2.8

Final domestic expenditure
Stockbuilding1
Gross national expenditure

-1.4
-0.3
-1.8

-1.5
-0.7
-1.9

2.5
0.7
3.3

3.5
0.3
4.0

2.6
-0.3
2.2

3.8
0.2
4.0

4.1
0.0
4.2

2.3
-0.3
2.1

3.8
0.1
3.7

4.1
0.0
4.1

2.5
0.0
2.5

Exports of goods and services
Imports of goods and services
Expenditure on GDP

-2.8
-3.6
-1.5

4.1
-9.2
1.9

2.8
11.4
1.0

2.2
6.7
2.7

3.1
1.3
2.7

-0.1
8.1
1.6

4.2
7.4
3.2

5.3
2.0
3.1

2.4
4.1
3.2

2.3
4.5
3.4

2.9
2.6
2.6

GDP (production)
GDP (production, March qtr to March qtr)

-1.3
-2.6

-0.5
1.5

1.4
1.1

2.5
3.0

2.3
1.9

2.8
3.5

3.6
3.0

2.5
2.8

3.4
3.5

3.4
3.1

2.6
2.3

1 Percentage point contribution to the growth rate of GDP.

34

RESERVE BANK OF NEW ZEALAND/MONETARY POLICY STATEMENT, AUGUST 2016

 Table 5.2
Summary of economic projections
(annual percent change, unless specified otherwise)
March year
Price measures
CPI
Labour costs
Export prices (in New Zealand dollars)
Import prices (in New Zealand dollars)
Monetary conditions
90-day rate (year average)
TWI (year average)
Output
GDP (production, annual average % change)
Potential output (annual average % change)
Output gap (% of potential GDP, year average)
Labour market
Total employment (seasonally adjusted)
Unemployment rate (March qtr, seasonally adjusted)
Trend labour productivity
Key balances
Government operating balance (% of GDP, year to June)
Current account balance (% of GDP)
Terms of trade (SNA measure, annual average % change)
Household saving rate (% of disposable income)
World economy
Trading-partner GDP (annual average % change)
Trading-partner CPI (TWI weighted)

RESERVE BANK OF NEW ZEALAND/MONETARY POLICY STATEMENT, AUGUST 2016

Actuals
2011
2012

2013

2014 2015 2016

Projections
2017 2018 2019

1.6
2.1
-2.7
-1.7

0.9
1.8
-4.9
-4.0

1.5
1.7
11.6
-3.1

0.3
1.8
-8.9
-3.4

0.4
1.8
0.3
0.9

1.1
1.7
-2.7
-2.0

1.7
1.9
4.5
3.0

2.1
2.0
3.2
2.3

3.1
69.0

2.7
72.2

2.6
74.0

2.7
77.6

3.6
79.3

3.0
72.6

2.2
75.3

1.8
74.5

1.8
73.3

-0.5
1.3
-2.3

1.4
1.4
-2.3

2.5
1.7
-1.6

2.3
2.1
-1.3

2.8
2.4
-1.0

3.6
2.7
-0.1

2.5
2.7
-0.3

3.4
2.7
0.4

3.4
2.7
1.1

2.6
2.6
1.1

-1.2
5.0
1.0

-0.4
5.9
1.0

1.6
6.0
1.0

0.6
6.3
1.0

0.1
5.7
0.8

3.7
5.5
0.7

3.2
5.4
0.6

2.0
5.2
0.6

2.5
4.8
0.6

2.5
4.4
0.7

1.5
4.5
0.7

-2.1
-7.0
-1.9
-2.1

-3.3
-1.5
-4.5
1.3

-9.0
-2.8
7.9
2.2

-4.3
-3.2
1.6
2.4

-2.0
-3.6
-4.3
2.0

-1.2
-2.5
11.7
1.8

0.2
-3.4
-0.3
-0.7

0.2
-3.0
-3.1
-0.4

0.3
-3.2
0.0
-0.1

1.0
-3.4
1.6
0.5

1.7
-3.0
1.3
0.7

0.3
1.6

1.2
2.2

4.5
3.2

3.4
2.7

3.2
2.3

3.4
2.3

3.6
1.0

3.5
1.3

3.2
1.8

3.3
2.2

3.4
2.3

2009

2010

3.0
3.1
7.2
17.4

2.0
1.3
-7.6
-11.1

4.5
2.0
7.8
3.4

6.7
65.6

2.8
66.6

-1.3
1.8
-0.5

35