Monetary
Policy
Statement
November 2016

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

 Monetary Policy Statement
November 2016

Projections finalised on 3 November 2016. Data finalised on 4 November 2016.
Policy assessment finalised on 9 November 2016.

Contents
1.  Policy assessment 

3

2.  Key policy judgements 

4

3.   International developments 

11

4.  Current domestic conditions 

15

5.  The macroeconomic outlook 

27

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

 Chapter 1
Policy assessment
The Reserve Bank today reduced the Official Cash Rate (OCR) by 25
basis points to 1.75 percent.
Significant surplus capacity exists across the global economy despite
improved economic indicators in some countries. Global inflation
remains weak even though commodity prices have come off their lows.
Political uncertainty remains heightened and market volatility is elevated.
Weak global conditions and low interest rates relative to New Zealand
are keeping upward pressure on the New Zealand dollar exchange
rate. The exchange rate remains higher than is sustainable for balanced
economic growth and, together with low global inflation, continues to
generate negative inflation in the tradables sector. A decline in the
exchange rate is needed.

Headline inflation continues to be held below the target range by
ongoing negative tradables inflation. Annual CPI inflation was weak in
the September quarter, in part due to 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, and reduced drag from tradables inflation.
Monetary policy will continue to be accommodative. Our current
projections and assumptions indicate that policy settings, including
today’s easing, will see growth strong enough to have inflation settle
near the middle of the target range. Numerous uncertainties remain,
particularly in respect of the international outlook, and policy may need to
adjust accordingly.
Graeme Wheeler

Domestic growth is being supported by strong population growth,
construction activity, tourism, and accommodative monetary policy.
Recent dairy auctions have been positive, but uncertainty remains
around future outcomes. High net immigration is supporting growth in
labour supply and limiting wage pressure.

Governor

House price inflation remains excessive and is posing concerns for
financial stability. Although house price inflation has moderated in
Auckland, it is uncertain whether this will be sustained given the
continuing imbalance between supply and demand.

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

3

 Chapter 2
Key policy judgements
•  Weak global conditions continue to dampen inflationary pressure in New
Zealand, particularly as low import prices and the high exchange rate
suppress tradables inflation.
•  Persistently negative tradables inflation is holding down headline
inflation, flowing through to inflation expectations and reducing
inflationary pressure.

•  Monetary policy is providing stimulus to the economy and GDP growth
has strengthened as expected.
•  Continued monetary policy stimulus is needed to support strong
GDP growth, generating an increase in non-tradables inflation over
the medium term and guarding against further declines in inflation
expectations.

4

Weak global conditions continue to have a disinflationary effect on New
Zealand. Significant spare capacity exists across advanced economies,
despite stimulatory monetary policy, and global inflation remains low.
Prices have declined for a range of commodities in recent years. Despite
some recovery, global commodity prices generally remain low relative to
history.
The positive outlook for growth in New Zealand relative to other
advanced economies, coupled with low global interest rates, has resulted
in continued strong investor appetite for New Zealand dollar assets.
This has supported an appreciation of the New Zealand dollar exchange
rate. The high exchange rate, low commodity prices and subdued
global inflation have translated directly into low prices for New Zealand’s
imports, suppressing tradables inflation.
Global conditions have also transmitted through the domestic economy,
limiting broader inflationary pressure. Declines in the prices for New
Zealand’s key export commodities since 2014 have caused a sharp fall
in the terms of trade, despite lower import prices. Low export prices,
particularly in the dairy sector, have dampened confidence and overall
business investment. While dairy prices have recently increased sharply,
profitability remains low, and confidence in the dairy sector is likely to

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

 Figure 2.1
CPI inflation
(annual)
8

Figure 2.2
Official Cash Rate

%

%
Projection

8

6

6

4

4

Non−tradables

2

2

0
−2
−4

0

Headline

−2

Tradables

2005

2007

2009

2011

2013

2015

2017

−4
2019

Source: Statistics New Zealand, RBNZ estimates.

remain subdued as there is significant uncertainty about the sustainability
of these price increases.
Weakness in foreign labour markets relative to New Zealand continues
to underpin high net immigration. While migration flows have increased
demand for housing and other goods and services, the impact per
migrant may have been smaller than in previous migration cycles.
Migration has also added to the supply of labour in the economy, which
has moderated some of the inflationary pressure associated with the
boost to demand.
Annual CPI inflation was 0.4 percent in the September 2016 quarter. This
low outturn reflected the factors outlined earlier that have been in play for
at least the past two years. Low annual inflation in September was also a
result of falls in petrol prices, reductions in ACC vehicle levies, and lower
domestic and international airfares.

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

9

%

%
Projection

9

8

8

7

7

6

6

5

5

4

4

3

3
Aug MPS

2
1

Nov MPS

2000

2003

2006

2009

2012

2015

2018

2
1

Source: RBNZ estimates.
Note: OCR projections are presented as a smoothed quarterly average. As with previous
90-day rate forecasts, projections are conditional on the Bank’s assessment of current economic
conditions and assumptions about the future evolution of the New Zealand economy. The August
track is implied from the 90-day rate in the August Statement.

Low tradables inflation appears likely to continue for some time given
the outlook for global inflation and policy rates, despite some recovery
in global commodity prices. As discussed in the August Statement, the
prolonged period of negative tradables inflation is unusual historically.
Monetary policy is typically able to look through sharp and transitory
movements in tradables inflation, focusing instead on the medium-term
trend in inflation. The persistent weakness in tradables inflation since
2012 has contributed to low headline CPI inflation (figure 2.1). This
has flowed through to declines in inflation expectations, presenting an
ongoing challenge for monetary policy.
Inflation expectations seem to respond to the persistent component of
observed headline inflation. As headline inflation remained low, due in
5

 part to the persistent weakness in tradables inflation, short-term inflation
expectations declined through 2015. Inflation expectations appear to
have stabilised since March. Low inflation expectations dampen
price- and wage-setting behaviour, weighing on future inflation,
particularly over the time horizon relevant for monetary policy. As such,
any further sustained falls in inflation expectations would be concerning.
The Policy Targets Agreement (PTA) directs 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 average inflation near
the 2 percent target midpoint. To move CPI inflation back within the
target range, and to reduce the risk that long-term inflation expectations
become unanchored from the target midpoint, continued monetary
stimulus is needed (figure 2.2). However, the Bank is flexible in its
inflation targeting approach. The projected path for the OCR is one
that supports strong but steady growth in the economy and provides
for a gradual increase of inflation towards the target midpoint. More
aggressive policy easing to drive inflation to the midpoint of the target
range much sooner risks generating unnecessary volatility in output,
interest rates and the exchange rate.
Low interest rates continue to stimulate the New Zealand economy. They
are encouraging businesses to undertake investment they may not have
done otherwise. In addition to strong population growth and housing
shortages, low interest rates are also stimulating residential investment.
Low mortgage rates are contributing to housing demand and rising
house prices, which historically have been associated with increased
consumption. Consumption per capita has been relatively muted so far
through this cycle, but as wealth, employment, income, and confidence
rise, household consumption is expected to strengthen.

6

GDP grew by 3.6 percent in the year to the June 2016 quarter, and
near-term indicators suggest this pace of growth is likely to continue.
Annual GDP growth is forecast to average around 3.8 percent over the
next year. This strength has been a feature of the Bank’s projections
for some time. Migration flows have increased the supply of labour and
productive capacity in the economy. In this environment, rising capacity
pressure requires strong rates of growth. This increase in capacity
pressure will contribute to higher non-tradables inflation.
The economic projections outlined in this Statement set out the Bank’s
plan for interest rates in order to meet the requirements of the PTA. There
is always uncertainty around these projections – economic conditions
can change suddenly, and economic relationships can evolve differently
from in the past. Our assessment of the outlook and the appropriate
policy response depend on a range of judgements. In the current
environment, the key judgements in our projections relate to how global
conditions might evolve, and how these global factors and domestic
policy stimulus transmit through the domestic economy. These key
judgements are described below. If the assumptions underpinning the
projections prove to be inconsistent with incoming data, or if risks to the
projections materialise, the outlook for monetary policy will be revised.
We have addressed a range of risks around these judgements in
previous Statements. In doing so we acknowledge the uncertainty around
specific assumptions and consider how alternative scenarios might
alter policy settings. While the focus of key risks may change between
Statements, we consider a wider set of uncertainties and risks around
our central projections. Chapter 5 revisits the range of risk scenarios from
previous Statements.

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

 Global economic conditions

Domestic demand

Global demand for commodities is assumed to increase, contributing to
an expected gradual increase in the prices of New Zealand’s imports and
exports. We assume that over the medium term the price of whole milk
powder will tend towards USD 3,000 per tonne, and that the Dubai oil
price will continue to gradually increase to around USD 60 per barrel.

The projected increase in domestic capacity pressure partly reflects an
increasing draw on resources in the construction sector. Residential
investment is projected to increase substantially over the next year
and remain at a high level through the projection. However, there is
uncertainty around the degree to which construction activity could be
constrained by the availability of land, labour, materials, and finance.
Different configurations of how constraints and demand pressures
interact could result in different outcomes for both activity and inflation.

The outlook for these commodity prices is uncertain. Dairy prices have
increased sharply over recent months, but we assume some of these
recent price gains are due to temporary factors and are likely to reverse.
Should these increases be sustained, the outlook for export prices and
domestic activity may be stronger than assumed.
As labour market conditions improve across advanced economies,
we expect net immigration to decline from its current elevated level.
Turning points in migration are difficult to forecast, and a stronger-thanassumed net inflow is plausible. For example, if labour market conditions
in Australia do not improve as expected, net immigration could remain
elevated. Alternatively, should the Australian labour market recovery gain
pace, net immigration could decline more sharply than assumed.
We assume that the New Zealand dollar Trade-Weighted Index (TWI)
depreciates over the projection to around 73. If world interest rates
remain lower for longer than markets currently anticipate, or if investor
appetite for New Zealand dollar assets increases, the New Zealand dollar
exchange rate could remain higher through the projection, necessitating
more-stimulatory monetary policy to offset the impact on inflation. In the
case that a higher exchange rate is underpinned by a stronger outlook
for the domestic economy, a monetary policy response may not be
necessary, as the impact of the higher exchange rate would likely be
offset by increasing domestic capacity pressure.

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

Low interest rates, high house prices, and improving income growth
– in part reflecting increasing export prices – underpin a forecast of
strengthening consumption growth. However, household spending is
assumed to remain modest relative to increases in housing wealth.
There are risks to both sides of the consumption outlook. Stronger-thanassumed export prices could boost confidence and incomes, increasing
spending. Additionally, consumption could be stronger if house price
inflation and low mortgage rates start to have more of an impact on
spending than assumed. On the other hand, renewed weakness in
commodity prices, or heightened concerns about global conditions or the
sustainability of household debt, could weigh more heavily on spending.

Price-setting behaviour
Long-term inflation expectations appear to be well-anchored close to
2 percent and are expected to remain around this level. Short-term
inflation expectations have fallen over the past year, reflecting recent
low headline inflation. Low inflation expectations affect future inflation
by dampening price- and wage-setting behaviour and, by raising real
interest rates, reduce the degree of stimulus to the economy for a given
level of nominal interest rates.
7

 We assume inflation expectations continue to respond to observed
inflation. Inflation expectations appear to have stabilised and, as headline
inflation increases over the projection, short-term inflation expectations
are expected to gradually increase. A risk to these projections is that
inflation expectations decline further in light of recent low inflation
outcomes – this risk would be particularly concerning if long-term inflation
expectations were also affected. Alternatively, should households and
businesses begin to set prices more in line with longer-term inflation
expectations, the dampening effect of inflation expectations on future
inflation could be less than assumed.

 

Box A
Recent monetary policy decisions
The Bank cut the OCR by 100 basis points through 2015 as the
deterioration in global economic and financial market conditions was
transmitted to the New Zealand economy via a range of channels and
dampened inflationary pressure (figure A.1). Accounting for the projected
forward path of interest rates, the downward revision in interest rates
was around 200 basis points. Import prices declined markedly, but
sharper falls in the prices of New Zealand’s key export commodities
resulted in a fall in the terms of trade. The effect of this on incomes and
confidence weighed on consumption and investment activity. Weakness
in global labour markets relative to New Zealand contributed to high net
immigration, supporting growth in the labour force.
Figure A.1
90-day interest rate
9

%

%

9

8

8

7

7

6

6

5

Dec 14

5

4

4

3

Jun 15
3
Dec 15
Jun 16 2
Aug 16

Actual

2
1
2000

2003

2006

2009

2012

2015

2018

1
2021

Source: RBNZ estimates.

8

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

 Since 2015, global conditions have continued to suppress domestic
inflationary pressure. The prolonged period of low headline inflation
heightened the Bank’s concerns about observed declines in inflation
expectations. A sharp fall in inflation expectations at the beginning of
2016, accompanied by a period of heightened volatility in financial
markets and renewed concerns about the outlook for global growth,
contributed to the Bank’s decision to cut the OCR by 25 basis points
at the March Statement. As conditions stabilised through the middle of
the year and the domestic economy showed signs of strengthening, the
Bank subsequently held the OCR unchanged at 2.25 percent at the June
Statement, but retained an easing bias.
Inflation expectations have remained stable since March, although
inflation has remained low. In the August Statement, and in subsequent
communications, the Bank acknowledged its expectation of weak
annual CPI inflation in the September 2016 quarter. The reasons for this
weakness were reasonably well anticipated – falling prices for petrol,
reductions in ACC vehicle levies, and lower domestic and international
airfares. Lowering interest rates would have done little to change these
outturns, given the lagged effect of monetary policy.

Figure A.2
Inflation expectations
(annual)
6

%

%

6

5

5

4

4

3

2−year

2

2
10−year

CPI
inflation

1
0

3

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.

In the August Statement the Bank acknowledged the unusual persistence
in tradables inflation, which through its impact on headline inflation was
contributing to low inflation expectations (figure A.2). In August, the Bank
also judged that given the outlook for global inflation and policy rates,
low tradables inflation was likely to continue for some time, raising a risk
of further declines in inflation expectations. To support strong domestic
growth and the return of inflation to target, and to reduce the risk of
further sustained falls in inflation expectations, the Bank cut the OCR by
25 basis points in August and retained an easing bias.

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

9

 Table 2.1
Key forecast variables

2014

2015

2016

2017

2018

2019

10

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

GDP growth
Quarterly
1.4
0.9
0.9
0.8
0.2
0.4
0.8
0.9
0.9
0.9
0.9
1.0
1.0
0.9
0.8
0.7
0.7
0.7
0.6
0.6
0.6
0.5
0.5
0.5

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

CPI inflation
Annual
1.5
1.6
1.0
0.8
0.3
0.4
0.4
0.1
0.4
0.4
0.4
1.1
1.3
1.5
1.7
1.7
1.6
1.7
1.9
2.0
2.1
2.1
2.1
2.1

TWI
80.1
81.5
80.1
77.5
77.9
76.1
69.8
72.1
72.2
73.6
77.0
76.8
76.4
75.9
75.5
75.1
74.7
74.4
74.2
74.0
73.7
73.6
73.4
73.3

OCR
Projection
2.6
3.0
3.4
3.5
3.5
3.4
3.0
2.7
2.4
2.3
2.1
1.9
1.8
1.7
1.7
1.7
1.7
1.7
1.7
1.7
1.7
1.7
1.7
1.7

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

 Chapter 3
International developments
•  Global economic activity has been subdued for some time and spare
capacity is only gradually being absorbed despite substantial monetary
policy stimulus. Downside risks to the global growth outlook remain
significant.
•  Global inflation is low due to the decline in commodity prices and
significant spare capacity in recent years.

•  Since the August Statement, there has been some increase in global
commodity prices, albeit from low levels. This increase is expected to
contribute to a moderate improvement in global inflation prospects.

•  Subdued global conditions are contributing to low inflation in New
Zealand, particularly through low import prices and the elevated New
Zealand dollar exchange rate.

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

Global economic slack remains significant. This is despite substantial
monetary policy stimulus since the global financial crisis, with policy
rates at record lows in many economies. Reflecting the significant spare
capacity and the decline in commodity prices in recent years, global
inflation remains low.
The subdued global environment is contributing to low inflation in New
Zealand. As discussed in chapter 4, low global inflation is suppressing
the prices of New Zealand’s imports. In addition, New Zealand’s
relatively high interest rates compared to other advanced economies
are contributing to strength in the New Zealand dollar. Chapter 5 further
discusses the outlook for activity and inflation in New Zealand.
In advanced economies, domestic demand, and particularly investment,
remains subdued. While spare capacity has reduced since 2009, output
gaps remain negative (figure 3.1) and unemployment rates remain high
in most economies. In emerging economies, growth rates vary across
regions, with high growth in economies such as India, contrasting with
recession in other economies such as Brazil. Globally, economies are
continuing to adjust to the structural slowdown in China, lower commodity
prices, weak growth in trade volumes, and declining population growth
rates.
11

 Figure 3.2
GDP growth
(annual)

Figure 3.1
Output gaps
(share of potential output)
%

%

6

2

2

5

5

1

1

4

4

0

3

−1

2

−2

1

1

−3

0

0

−4

−1

0

IMF
advanced economies

−1
−2
−3

OECD economies

−4

2000

2003

2006

2009

2012

2015

Source: Haver Analytics.

The International Monetary Fund (IMF) is forecasting global growth
to increase over the projection while growth in New Zealand’s trading
partners is expected to remain around current levels (figure 3.2). The
increase in global growth is expected to be driven almost entirely by a
recovery in stressed emerging market and developing economies, such
as Brazil and Russia. These economies are not major trading partners
for New Zealand. The strengthening in global growth also reflects the
increasing weight of large market economies, such as China, that are
growing faster than the world average. While not matched by increased
trading-partner growth, the increase in global growth still has positive
consequences for New Zealand.
Although global commodity prices remain at low levels, prices have
increased since the beginning of 2016 (figure 3.3). Contributing to
this increase is a gradual reduction in supply for certain commodities.
Demand also appears to have stabilised somewhat, aided by fiscal
12

%

%
Proj. 3

3

Projection

2000

2003

2006

3

IMF world growth
(PPP weighted)

RBNZ
trading−partner
growth

6

2

2009

2012

2015

2018

−1

Source: Haver Analytics, RBNZ estimates.

stimulus in China. Increasing commodity prices are contributing to the
improvement in growth prospects for commodity exporting economies
and are expected to support higher global inflation in 2017.
Annual inflation in New Zealand’s trading-partner economies is low, at
1.1 percent in the September quarter (figure 3.4). Low inflation reflects
significant declines in commodity prices and persistent spare capacity
in many product and labour markets. In 2017, trading-partner inflation
is expected to increase as the decline in oil prices falls out of annual
inflation calculations across economies. In advanced economies,
market-based measures of expected inflation have also increased, which
may reflect a more balanced outlook for the risks around inflation.
Downside risks to the global economic outlook remain significant. The
near-term risk of a sharp slowdown in growth in China has moderated
from earlier in the year following the use of short-term policy measures to

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

 Figure 3.4
Trading-partner inflation
(annual)

Figure 3.3
Commodity prices
Index

USD/barrel

130

120

120

100

110
Industrial metals

100

80

60

Brent crude oil
(RHS)

70

40

60
50

80

Agriculture

90

Bloomberg Index

14Q1

14Q3

15Q1

15Q3

16Q1

16Q3

20

6

%

%
Projection

6

5

5

4

4

3

3

2

2

1

1

0

0

−1

2000

2003

2006

2009

2012

2015

2018

−1

Source: Haver Analytics, RBNZ estimates.

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

promote growth. However, these measures raise the level of debt, which
poses increased risks to the medium-term growth outlook for China.
Elections in the United States and throughout Europe are also creating
uncertainty about the outlook for global activity. In addition, increasing
concerns around the benefits of global integration could result in
increased inward-looking policies, negatively affecting global trade flows
and global output.
Global growth is being supported by extraordinarily accommodative
monetary policy (figure 3.5). Policy rates are at record lows across
most advanced economies and are expected to remain stimulatory
over coming years. In 2016, quantitative easing by central banks has
been at its highest level since the global financial crisis. The degree
of unconventional monetary policy is unlikely to increase further. Only
one major central bank – the Federal Reserve in the United States – is

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

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.

13

 expected to raise its policy rate in the near term. The Federal Reserve
is expected to increase its policy rate in December, but continue to
withdraw stimulus only gradually from then on.
Globally, policy makers are acknowledging the financial stability
risks from using additional monetary policy stimulus to further aid the
economic recovery. Several international organisations, such as the
IMF, are advocating greater use of fiscal policy and structural reforms to
further stimulate activity. Some countries, including China, Japan, and
Canada, are already using increased fiscal stimulus to support growth.
Overall, these policies, if effectively designed and implemented, may
increase productivity and potential growth.
Bond yields have increased from their historical lows over recent
weeks (figure 3.6). This increase has been driven by some reduction in
uncertainty around the global growth outlook, and the higher inflation
outlook as commodity prices have risen. A possible shift in policy mix
away from further monetary policy accommodation and the potential for
increased use of fiscal policy have also contributed to the increase.

Figure 3.6
10-year government bond yields
7

%

%

7

6

6

5

New Zealand

4
US

3

Germany

1
0
−1

2

UK

1

Japan

2009

2010

2011

2012

2013

2014

4
3

Australia

2

5

2015

2016

0
−1

Source: Bloomberg.

Global currency markets have been relatively stable since the August
Statement. One exception is the British pound, which has continued to
weaken significantly following the United Kingdom referendum result
to leave the European Union. The United States dollar has appreciated
modestly over this period as expectations have increased for a rise in the
Federal Reserve policy rate before the end of 2016.

14

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

 Chapter 4
Current domestic conditions
•  Global excess capacity and the high New Zealand dollar exchange rate
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 strengthening, supported by low interest rates, high
population growth, and strong tourist spending.

•  Excess capacity is being eroded, with the output gap estimated to
have increased to slightly above zero. Capacity pressure appears to be
particularly tight in the construction sector.

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

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

Imported inflation
Economic slack in the international environment has contributed to low
inflation in New Zealand. Excess capacity and low commodity prices
have suppressed inflation globally and led to declines in the prices of
the goods New Zealand imports. In addition, the New Zealand dollar
remains elevated (figure 4.1), in part supported by highly accommodative
monetary policy in the rest of the world. Together, the strong dollar and
low import prices dampen headline inflation in New Zealand, mainly
through its tradables component.
Annual tradables inflation has been negative since 2012. Annual
tradables inflation declined to -2.1 percent in the September 2016
quarter, from -1.5 percent in the June quarter. Reflecting sharp falls
in global oil prices, domestic fuel prices declined by about 11 percent
in the year to the September quarter. This is currently subtracting 1.3
percentage points from annual tradables inflation and 0.6 percentage
points from annual headline inflation. However, the weakness in
tradables inflation predates the prolonged fall in oil prices. Excluding fuel,
tradables inflation has been negative since 2011 (figure 4.2).

15

 Domestic financial conditions

Figure 4.1
New Zealand dollar exchange rates
Rate

0.90

Index

90

NZD/USD

0.85

85

0.80

80
TWI
(RHS)

0.75

75

0.70

70

0.65

65

0.60

14Q1

14Q3

15Q1

15Q3

16Q1

16Q3

60

Source: Thomson Reuters, RBNZ.

40

8

Tradables (RHS)

20
10

Fuel

0
−10

Tradables ex−fuel (RHS)

−20
−30

2007

2009

2011

2013

2015

Source: Statistics New Zealand, RBNZ estimates.

16

Bank funding costs remain elevated due to a continued widening in
funding spreads. Term wholesale funding markets have remained settled,

7.5
%

30

However, the recent rise in offshore yields (see chapter 3) has caused
an increase in wholesale interest rates in New Zealand. The 2-year swap
rate, for example, is around 20 basis points above its level at the time of
the August Statement. Higher wholesale rates suggest that banks may
be under pressure to raise mortgage rates.

Figure 4.3
Mortgage interest rates

Figure 4.2
Components of tradables inflation
(annual)
%

In response to weak inflationary pressure, the OCR has been reduced
over the past 18 months. Mortgage rates remain around record lows
(figure 4.3).

%

7.5

7.0
6.5

4

6.0

2

5.5

0

5.0

−2

4.5

−4

4.0

7.0

Floating

3−year

6

−6

%

6.5

5−year

6.0
5.5
1−year

5.0

2−year

4.5
2012

2013

2014

2015

2016

4.0

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

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

 Figure 4.4
Banks’ marginal funding costs
6.0

%

%

6.0

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

5.5
5.0
4.5
4.0

5.5
5.0
4.5
4.0

3.5

3.5

3.0

3.0

2.5

2.5

2.0

2.0

1.5

2012

2013

2014

2015

2016

1.5

Source: Bloomberg, RBNZ estimates.

%

%

20

15

15

↑ Tightening

10

10

Agriculture
Household

5

5

0

0

−5

−5

−10

−10

−15
−20

−15

Business

2010

2011

2012

2013

2014

The RBNZ Credit Conditions Survey suggests that banks have tightened
their lending standards over the past six months across each of the
household, business, and agriculture sectors (figure 4.5). The tightening
has been most notable in the commercial property sector, consistent
with recent anecdotes that some property developers are finding it more
difficult to access financing from banks (see box B).

Domestic activity

Figure 4.5
Change in bank lending standards
(net percentage)
20

but weaker domestic deposit growth is putting pressure on banks to
compete more aggressively to retain deposits. As deposits constitute
a large share of total bank funding, this is holding up the average cost
of new funding for banks (figure 4.4). While the increase in funding
pressures since the August Statement has been modest, it adds to
already elevated funding spreads.

2015

2016

−20

Source: RBNZ Credit Conditions Survey.
Note: Net percentage is the percentage of respondents reporting a tightening of lending
standards minus the percentage reporting an easing. Individual bank responses are weighted by
market share.

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

Monetary policy is providing stimulus to demand, supporting economic
growth. Economic activity in the past year has been marginally stronger
than the Bank’s projections (figure 4.6). The economy expanded by 0.9
percent in the June quarter, implying growth of 3.6 percent on an annual
basis (figure 4.7). The strength in economic activity is underpinned by the
construction and service sectors, supported by strong population growth
and tourist spending. Quarterly GDP growth is expected to remain steady
around current levels for the remainder of 2016. As GDP is forecast to
grow at a faster rate than the economy’s productive capacity, the output
gap is projected to rise, contributing to inflationary pressure.
Net immigration remains high, reflecting relatively favourable labour
market conditions in New Zealand. On an annual basis, the net inflow
of working-age migrants rose to a new peak of around 60,000 in
September (figure 4.8). Net permanent and long-term immigration added

17

 Figure 4.8
Migration
(annual)

Figure 4.6
GDP growth outturns and RBNZ projections
(quarterly, s.a.)
1.0

%

%
Expected
growth

0.8

1.0

Actual
growth

0.8

000s

000s

110

70
60

100

50

90
0.6

0.6

0.4

0.4

40

80

30

Arrivals

20

70

10

60
0.2

0.2

0.0

0.0

15Q3

15Q4

16Q1

16Q2

50
40

2000

2006

2009

2012

−10
2015

−20

Source: Statistics New Zealand, RBNZ estimates.

Source: Statistics New Zealand, RBNZ estimates.

Note: This figure compares GDP growth for each quarter with the projection from the
most recent Statement prior to the release of the data.

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

Figure 4.9
Contributions to working-age population growth
(annual)

Figure 4.7
GDP growth
(s.a.)
%

%

5
4
3
2
1
0

Quarterly (RHS)

−1
−2

Annual

−3
−4

2005

2007

2009

2011

2013

2015

Source: Statistics New Zealand, RBNZ estimates.

18

2003

0

Net
(RHS)

Departures

%

%

2.0

3.0

3.0

1.5

2.5

1.0

2.0

0.5

1.5

0.0

1.0

1.0

−0.5

0.5

0.5

−1.0

0.0

−1.5

−0.5

2.5

Migration

2.0
1.5

Working−age
population

0.0

Natural increase

2000

2003

2006

2009

2012

2015

−0.5

Source: Statistics New Zealand, RBNZ estimates.

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

 1.7 percentage points to working-age population growth in the year to
September (figure 4.9).

Figure 4.10
House price inflation
(annual)
30

%

%

30

25

Canterbury

25

Auckland

20

20

15

15

10

10

5

5

0

0

−5

Rest of New Zealand

−10
−15

−5

The combination of high population growth, low mortgage rates, and a
shortage of housing in Auckland has continued to exert upward pressure
on house prices. While the average house price in Auckland remains
close to its historical peak, annual house price inflation has moderated
recently (figure 4.10). This follows the announcement of further tightening
of loan-to-value ratio restrictions in July 2016. Outside of Auckland and
Canterbury, house price inflation reached a 10-year high in July, but has
fallen slightly since.

−10
2000

2003

2006

2009

2012

2015

−15

Source: REINZ, RBNZ estimates.
Note: The data shown are in three-month moving-average terms.

Strong demand for housing and low interest rates continue to stimulate
residential investment. Residential investment grew by around 6 percent
in the June quarter, bringing growth over the first half of 2016 to
11 percent. Strong consent issuance in recent months suggests further

Figure 4.11
Residential investment and building consents
(investment as a share of potential output)
8.0

%

Figure 4.12
Residential building consents
(3-month moving average, s.a.)

Number

3000

Number

Number

1500

1500

7.5
7.0

2500
Residential
investment

6.5

1200
Rest of
New Zealand

900

6.0

900

2000
Residential
consents (RHS)

5.5

600

5.0

1500

4.5
4.0

1200

2000

2003

2006

2009

2012

Source: Statistics New Zealand, RBNZ estimates.

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

2015

1000

600
Auckland

300
0

300

Canterbury

2000

2003

2006

2009

2012

2015

0

Source: Statistics New Zealand, RBNZ estimates.

19

 Figure 4.13
Consumption growth
(annual)
8

%

%

8

6

6

4

4

2

2

0

0

−2
−4

−2
2000

2003

2006

2009

2012

2015

Figure 4.14
Tourism activity and spending
(quarterly, s.a.)
$m

000s

900

3000
Short-term arrivals
(RHS)

2800

2400

600

2200

Real exports
of travel services

2000
1800

2000

2003

2006

2009

500

2012

Source: Statistics New Zealand, RBNZ estimates.

20

800
700

2600

2015

Domestic economic activity has also been supported by increasing
consumption (figure 4.13). In the June quarter, consumption grew by
1.9 percent, with the durable goods component increasing by around
3.5 percent. In addition to low interest rates and population growth,
consumption has been stimulated by increasing household wealth and
growth in real labour incomes. Consumer confidence has improved since
the August Statement.

−4

Source: Statistics New Zealand.

3200

expansion in residential investment (figure 4.11). The strength in consent
issuance has been broad-based across regions (figure 4.12). Strength
in Auckland is likely to continue as the Auckland Unitary Plan becomes
operative and relaxes some impediments to increasing housing supply.

400

Strong tourist spending continues to support domestic growth.
Short-term visitor arrivals reached a historical high in the September
quarter (figure 4.14). Arrivals from most regions have increased in recent
years, particularly from Asia. While average expenditure per visitor has
declined over the first half of the year, total visitor spending has remained
stable at a high level. However, tourist spending may come under
pressure if the New Zealand dollar remains elevated.
Consistent with declines in global commodity prices, weak global
demand contributed to sharp falls in international prices for New
Zealand’s commodity exports through 2014-2015. While the ANZ
commodity price index has increased by nearly 15 percent since January,
it remains about 20 percent below its 2014 peak (figure 4.15).
Much of the recent improvement can be attributed to a rise in the prices
of dairy and meat products. Dairy prices on the Global Dairy Trade
platform have spiked higher recently, increasing by 44 percent since July
to about USD 3,300 per tonne. Sharp movements in dairy prices are not
unusual: they have historically been the most volatile of New Zealand’s

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

 Capacity pressure

Figure 4.15
Commodity prices
(SDR, s.a.)
Index

Index

450

450

Dairy

400

400

350

350

300

300

250
200

200

Aggregate

150

150

100
50

250

Meat, pelts,
and wool

100

Forestry

2000

2003

2006

2009

2012

2015

50

Source: ANZ, RBNZ estimates.

The output gap is currently estimated to be slightly above zero (figure
4.16). This estimate is supported by a suite of indicators of capacity
pressure, but is subject to considerable uncertainty. In the September
Quarterly Survey of Business Opinion, a range of measures of capacity
pressure increased, across industries and across regions. Capacity
pressure is particularly tight in the construction industry, with an
increasing share of firms reporting difficulty finding skilled and unskilled
labour.
A broad range of indicators suggest that labour market conditions are
tightening (figure 4.17). Employment growth has been strengthening.
At the same time, strong population growth and a rising labour force
Figure 4.16
Output gap and indicator range
(share of potential output)

commodity export prices. It is highly uncertain to what degree these price
gains will be sustained.
In response to low dairy prices since 2014, dairy farmers have cut
back significantly on feed, capital and maintenance expenditures.
Low commodity export prices also tend to dampen broader business
confidence. This, along with limited capacity pressure across the
economy, has contributed to business investment remaining relatively
flat since early 2015. However, alongside the more recent increases in
commodity export prices, business confidence indicators are improving
and business investment is expected to increase through the end of
2016.

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: The shaded area indicates the range between maximum and minimum values from a
suite of indicators of the output gap.

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

21

 participation rate have contributed to significant growth in the labour
force. As the increased labour force has largely been absorbed into
employment, the unemployment rate has been stable around 5 percent
over the past year, and in the September quarter decreased to 4.9
percent.

Pricing and inflation

Index

Index

2

2

1

1

0

0

−1

−1

−2

−2

2003

2006

2009

2012

2015

Source: Statistics New Zealand, RBNZ estimates.
Note: A higher index value indicates a greater degree of tightness.

22

%

%

10

8

Non−tradables ex. housing
and household utilities

4

6
4

2

2

Housing and
household utilities

0
−2

8

2000

2003

2006

Construction costs
(excluding land)

2009

2012

2015

0
−2

Source: Statistics New Zealand.
Note: Construction costs are a subcomponent of ‘housing and household utilities’.

Figure 4.17
Labour utilisation composite index (LUCI)

2000

10

6

Despite the tightening of capacity pressure since 2011, non-tradables
inflation remains below average. Annual non-tradables inflation was
2.4 percent in the September quarter, up from 1.8 percent in the June
quarter. Price increases are most pronounced for CPI components
related to construction costs and housing (figure 4.18). This is consistent
with tightening capacity pressure in the construction sector. In the

−3

Figure 4.18
Components of non-tradables inflation
(annual)

−3

September quarter, annual construction cost inflation increased to
6.3 percent at the national level and 7.9 percent in Auckland.
Annual non-tradables inflation continues to be dampened by price
declines of specific components. ACC levies were reduced by 33 percent
on average across motor vehicle categories from 1 July 2016.
The combination of below-average non-tradables inflation and
persistently negative tradables inflation has resulted in annual headline
inflation remaining low at 0.4 percent in the September quarter (figure
4.19). Headline inflation is expected to increase to the lower end of the
target range in the December quarter, as the fuel price declines of
late-2015 drop out of the annual calculation.

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

 Figure 4.19
CPI inflation
(annual)
8

Figure 4.20
Inflation expectations curve
(annual, by number of years ahead)

%

%

8

6

6

4

4

Non−tradables

2

2

0

−4

Tradables

2002

2004

2006

2008

2010

%

%

4

3

3

2012

2014

−2
−4
2016

Weak headline inflation in recent years has exerted downward pressure
on short-term inflation expectations. Short-term inflation expectations
across a broad range of measures remained stable in the September
quarter, but remain below 2015 levels and below the 2 percent target
midpoint (figure 4.20). Long-term inflation expectations remain anchored
near the 2 percent target midpoint.

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

2

Aug 2016 MPS

1

1

0

1

Source: Statistics New Zealand, RBNZ estimates.

Headline inflation has averaged 2.1 percent since the Bank adopted the
medium-term target range of 1 to 3 percent for annual headline inflation
in September 2002. Over this period, annual headline inflation has been
above the target range in 14 quarters and below the range in 13 quarters.
Given the fluctuations typically observed in macroeconomic aggregates
over the business cycle, it is not surprising that periods of above-target
inflation have been counteracted by phases when inflation has been
below target.

Nov 2016 MPS

Dec 2015 MPS

2

0

Headline

−2

4

2

3

4

5

6

7

8

9

10

0

Source: ANZ Bank, Aon Consulting, Consensus Economics, RBNZ
estimates.

Figure 4.21
Core inflation measures
(annual)
6

%

%

6

5

5
Sectoral factor
model

4
3

0

2

CPI
ex−food
and energy

1
2000

2003

2006

2009

4
3

Weighted
median

Factor
model

2

Trimmed mean
(30 percent)

1
2012

2015

0

Source: Statistics New Zealand, RBNZ estimates.

23

 Given the significant influences of temporary and sector-specific price
movements on headline CPI inflation, the Bank uses a wide range
of measures of core inflation to assess the strength of underlying
inflationary pressures. The Bank’s sectoral factor model sits at
1.5 percent for the September quarter (figure 4.21). All measures of core
inflation have increased since mid-2015 and currently range between
1.1 and 1.7 percent.

Box B
Summary of recent business visits
The Bank regularly meets a range of organisations to improve our
industry knowledge and understanding of current economic conditions.
We use this information to inform our economic projections. In our most
recent round of business visits, we spoke with 40 organisations across
New Zealand. Half of these organisations are in the construction industry,
reflecting the important contribution that construction is currently making
to overall economic growth, and reflecting our focus on understanding
activity and capacity in the industry.
Construction activity has increased significantly in recent years. Contacts
note that demand is very high and business sentiment in the industry
is positive. Activity is expected to remain elevated for some time, but
contacts suggest that the construction industry is operating close
to full capacity and there may be little scope for activity to increase
considerably from current levels.
As activity related to the Canterbury rebuild plateaus, the focus of the
construction industry is shifting towards Auckland. However, contacts
observe a sense of hesitation among construction firms to expand rapidly
in Auckland given uncertainties around the outlook. While the Auckland
Unitary Plan is generally viewed positively in terms of providing more
certainty and alleviating current land shortages, there are concerns that
other constraints will limit the boost to construction activity.
The construction industry is reportedly facing several constraints that
may impede future activity, such as access to labour, materials, and
funding. Most contacts are struggling to find labour to fill a wide range
of positions. The labour shortage is reportedly most acute in Auckland,

24

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

 where high living costs are deterring construction workers from relocating
from Canterbury or immigrating from overseas.
Contacts note that it is also becoming increasingly difficult to access
construction materials, with shortages becoming acute for some
materials. This is leading to some construction firms facing long
wait-times and cost increases.
There has recently been a tightening in credit availability in the
construction industry, constraining some firms’ ability to increase activity.
Contacts note that new and small firms, as well as apartment developers,
have been impacted most severely. A lack of funding has led to some
construction projects being deferred or cancelled, and contacts expect
that credit conditions will continue to tighten. Changes to retentions policy
and increased demand for bonding (the provision of liquid assets as
assurance that work will be completed) are reportedly putting even more
pressure on construction firms’ cash flow.1

In the economy more broadly, contacts are generally feeling positive
about current conditions. They cite steady growth in a competitive
environment. Contacts are optimistic about the future, with risks primarily
seen as stemming from the fragile global environment. High levels of
competition are compressing margins and firms are thinking strategically
about how to ease this pressure. Despite low interest rates, there is
a reluctance to increase debt. Contacts note that labour is becoming
difficult to find, especially in Auckland and Queenstown where living costs
are high.
The tourism industry is doing particularly well, supported by a high
number of tourist arrivals. The World Masters Games and the Lions
rugby tour in 2017, as well as new flying routes to the United States’ east
coast, are expected to underpin strength in tourism. Contacts note that
the primary industry fared better than anticipated over the past season
and expectations are for conditions to improve.

The New Zealand construction industry is dominated by small
construction firms. Contacts highlight that this fragmented industry
structure could present a challenge to meeting future demand. The
industry struggles to achieve large-scale construction and innovation
is limited. These factors could impede high-density construction and
intensification in Auckland. A move towards new procurement methods
and prefabricated or modular housing is seen as a positive, and a
necessary step forward. The entry of large international construction
firms into the New Zealand market could further aid the industry in
overcoming these challenges by increasing scale and introducing new
technology.
1 

As of 31 March 2017, retention money withheld under commercial construction contracts is required to
be held on trust, meaning firms cannot access it when cash flow is tight.

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

25

 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)

Mar

Jun

0.3
2.4
-2.4
1.3
1.0
1.7
-0.8

2015

2016

Sep

Dec

Mar

Jun

Sep

Dec

0.4
2.1
-1.8
1.3
0.8
1.3
0.5

0.4
1.5
-1.2
1.4
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
1.5
1.1
1.5
1.3

0.4
1.8
-1.5
1.5
1.2
1.7
1.2

0.4
2.4
-2.1
1.5
1.3
1.7

1.7

1.7

1.7

1.7

1.4

1.4

1.5

1.4

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 expectations1

1.8
2.1
2.2

1.9
2.1
2.2

1.9
2.2
2.2

1.9
2.1
2.2

1.6
2.0
2.1

1.6
1.9
2.0

1.7
2.0
2.1

1.7

2.1

2.1

2.1

2.1

2.0

2.0

2.1

2.1

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

9.1
2.0
16.5

11.0
2.1
12.6

14.9
-0.4
11.4

11.2
-2.5
10.8

11.6
4.2
9.1

13.4
-2.6
18.4

4.3
26.5

18.3

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.

26

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

 Chapter 5
The macroeconomic outlook
•  Spare capacity in the global economy and the high exchange rate are
expected to continue to dampen import prices. The outlook for tradables
inflation remains subdued.
•  Low inflation expectations are expected to continue to dampen headline
inflation.

•  Monetary policy is forecast to remain accommodative throughout the
projection to ensure that future average inflation settles near the middle
of the target range.
•  Low interest rates are expected to continue to stimulate the domestic
economy through a range of channels, increasing capacity pressure, and
generating an increase in inflation.

As discussed in chapter 3, considerable slack remains in the global
economy despite significant monetary policy stimulus. Inflation in
advanced economies remains below central banks’ targets, and global
commodity prices are at low levels, despite stabilising over 2016.
A weak global economy and low global interest rates relative to New
Zealand interest rates have contributed to continued strength in the
exchange rate (figure 5.1). The New Zealand dollar TWI is slightly
higher than assumed in the August Statement. Over the medium term,
the exchange rate is projected to depreciate gradually, reflecting an
improvement in global economic conditions and a narrowing of interest
rate differentials between New Zealand and other advanced economies.
Import prices are expected to increase gradually from low levels over the
projection (figure 5.2). The Dubai oil price has risen since the beginning
of 2016, and is assumed to increase to around USD 60 per barrel by the
end of the projection.
Low import prices and the high exchange rate mean the medium-term
outlook for tradables inflation remains subdued (figure 5.3). In the near
term, the increase in fuel prices will increase tradables inflation. Over
the medium term, tradables inflation is expected to increase gradually,
supported by a depreciation of the exchange rate.

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

27

 Figure 5.1
New Zealand dollar TWI

Figure 5.3
Tradables inflation
(annual)

Index

Index

85

Projection

80

Nov MPS

75
Aug MPS

6

6

4

4

2

Aug MPS

60

60

55

55

−2

50

−4

2000

2003

2006

2009

2012

2015

2018

0

−2

Nov MPS

2000

2003

2006

2009

2012

2015

−4

2018

Source: Statistics New Zealand, RBNZ estimates.

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

Figure 5.4
Official Cash Rate
Index

2
0

Source: RBNZ estimates.

Index

8

70
65

1.30

%

%

1.30

9

1.25

1.25

8

8

1.20

1.20

7

7

1.15

1.15

6

6

1.10

1.10

5

5

4

4

1.05

1.05

3

3

1.00

1.00

2

2

0.95

1

0.95

Projection

2000

2003

2006

2009

2012

2015

Source: Statistics New Zealand, RBNZ estimates.

28

80

Projection

65

50

%

8

75

70

%

85

2018

Projection

2000

2003

2006

2009

2012

2015

2018

9

1

Source: RBNZ estimates.

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

 Figure 5.5
Migration
(quarterly, s.a.)

Figure 5.6
House price inflation
(annual)

000s

000s

30

Projection

20
15

25

10
20

Arrivals

5
15
Net
(RHS)

Departures

10

2000

2003

2006

0

2009

2012

2015

2018

−5

Source: Statistics New Zealand, RBNZ estimates.

25

%

%
Projection

25

20

20

15

15

10

10

5

5

0

0

−5
−10

−5
2000

2003

2006

2009

2012

2015

2018

−10

Source: CoreLogic NZ, RBNZ estimates.

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

As noted in chapter 4, short-term inflation expectations remain low. Low
inflation expectations reduce the outlook for inflationary pressure through
two channels: a dampening impact on price- and wage-setting behaviour,
and a reduction in the degree of real stimulus provided to the economy
for a given level of nominal interest rates. Inflation expectations are
projected to recover only gradually as CPI inflation increases towards the
midpoint of the target range.

Net immigration is projected to stay elevated in the near term (figure 5.5),
as New Zealand’s labour market conditions remain favourable relative to
the rest of the world. Net immigration is expected to moderate over the
medium term, as foreign labour markets improve. Continued historically
high net immigration is expected to increase domestic demand, and
contribute to house price inflation. However, migrant inflows will also add
to labour supply, having a moderating influence on wage growth.

In response to weak inflationary pressure, and low inflation expectations,
the Bank has lowered the Official Cash Rate considerably over the past
18 months (figure 5.4). This has provided significant monetary stimulus
to the domestic economy. Mortgage rates are at historically low levels,
supporting household borrowers. Monetary policy is projected to remain
accommodative and support domestic activity, so that future average
inflation settles near the middle of the target range.

Low interest rates, strong population growth, and a housing shortage
in Auckland mean that house price inflation is expected to remain high
in the near term, despite some softening in recent months (figure 5.6).
House price inflation is forecast to moderate over the second half of
the projection horizon as net immigration moderates, housing supply
increases, and affordability constraints begin to bind.

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

29

 Figure 5.7
Residential investment
(share of potential output)
%

8.0

%
Projection

7.5

8.0
7.5

7.0

7.0

Aug MPS

6.5

6.5

Nov MPS

6.0

6.0

5.5

5.5

5.0

5.0

4.5

4.5

4.0

2000

2003

2006

2009

2012

2015

4.0

2018

Source: Statistics New Zealand, RBNZ estimates.

Figure 5.8
Consumption growth
(annual)
8

%

%
Projection

6

6

4

4

2

2

0

0

−2
−4

−2
2000

2003

2006

2009

2012

2015

Source: Statistics New Zealand, RBNZ estimates.

30

8

2018

Construction activity is a key contributor to capacity pressure over the
projection. Residential investment is stronger than projected in the
August Statement and is forecast to remain elevated (figure 5.7). Strong
population growth and a housing shortage in Auckland, as well as high
house prices, continue to underpin residential investment. The Auckland
Unitary Plan is assumed to support residential investment over the
medium term. However, the extent to which greater land availability will
increase activity in Auckland is uncertain.
Consumption growth is forecast to strengthen in the near term, supported
by low interest rates, high net immigration, and house price and income
growth (figure 5.8). Consumption growth is expected to moderate from
2017, as migration and house price inflation start to slow.
Dairy prices have increased from a low level since the August Statement.
There is uncertainty about the degree to which recent increases will
be sustained – we assume some of this increase will be temporary.
Abstracting from near-term volatility, we project dairy prices to trend
towards a level consistent with a whole milk powder price of USD 3000
per tonne over the medium term. In line with these developments export
prices are expected to increase (figure 5.9).
Business investment is projected to increase over the forecast horizon
(figure 5.10). This is driven by strength in non-residential construction
investment in response to high population growth and low interest rates.
An increase in commodity prices and business confidence, and signs of
rising capacity pressure in the economy, are also expected to support
increasing business investment through the projection.

−4

Overall, annual GDP growth is expected to average around 3.1 percent
over the projection horizon, exceeding average potential growth of
around 2.7 percent. The resulting rise in capacity pressure generates an

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

 Figure 5.9
Export prices
(world terms, s.a.)

Figure 5.11
Output gap
(share of potential output)

Index

Index

1.9

1.9

Projection

1.8

1.8

4

%

%
Projection

4

3

3

2

2

1.5

1

1

1.4

1.4

0

0

1.3

1.3

1.2

1.2

1.1

1.1

1.7

1.7

1.6

1.6

1.5

1.0

2000

2003

2006

2009

2012

2015

1.0

2018

−1

−1

−2

−2

−3

2000

Source: Statistics New Zealand, RBNZ estimates.

%

%
Projection

30

20

20

10

10

0

0

−10
−20

−10

2000

2003

2006

2009

2012

2015

Source: Statistics New Zealand, RBNZ estimates.

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

2006

2009

2012

2015

2018

−3

Source: Statistics New Zealand, RBNZ estimates.

Figure 5.10
Business investment growth
(annual)
30

2003

2018

increase in non-tradables inflation throughout the projection, reaching 3.4
percent by 2018 (figures 5.11 and 5.12). Annual CPI inflation is expected
to return to the bottom of the target range in the December 2016 quarter,
and trend towards the midpoint of the target range over the medium term
(figure 5.13).

Risk analysis
These projections represent the Bank’s central view of how the New
Zealand economy is expected to evolve over the next few years. Given
this view, the projected path for the OCR is consistent with future average
inflation settling around the target midpoint.

−20

However, as noted in chapter 2, the projections and the appropriate
policy response depend on a range of judgements about how global
conditions might evolve, and how these global factors and domestic
31

 Figure 5.12
Non-tradables inflation
(annual)
5.5

Figure 5.14
Official Cash Rate

%

%
Projection

5.0

5.5

4.0

5.0

3.5

4.5

4.5

4.0

4.0

3.5

3.5

3.0

3.0

2.5

2.5

2.0
1.5
1.0

2000

2003

2006

2009

2012

2015

2018

2.5

2.0

1.0

1.0

1.5

0.5

0.5

1.0

0.0

4

3

3

2

2

1

1
2015

Source: Statistics New Zealand, RBNZ estimates.

32

6

4

2012

2.5

1.5

5

2009

Scenarios

1.5

5

2006

3.0

Nov MPS

2.0

%
Projection

2003

3.5

2010

2012

2014

2016

2018

0.0

Source: RBNZ estimates.

%

2000

4.0

2.0

Figure 5.13
CPI inflation
(annual)

0

%
Projection

3.0

Source: Statistics New Zealand, RBNZ estimates.

6

%

2018

0

policy stimulus transmit through the domestic economy. If the judgements
do not hold or unforeseen developments occur, the projections could
change, with the outlook for monetary policy revised accordingly.
The Bank has illustrated a range of scenarios in Statements over the past
18 months, focusing on key risks that could alter the central projections
(box C summarises the detail of the various scenarios). As the dominant
global and domestic influences on our projections have remained broadly
similar over the past year, these risks remain relevant and the scenarios
remain informative.
We have considered the following externally focused risks to the New
Zealand economy:
• 

A higher exchange rate due to increased investor preference for
New Zealand dollar assets.

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

 • 

Higher funding costs.

Box C

• 

Lower export prices for longer.

Summary of previous risk scenarios

• 

Lower global commodity prices due to a global demand shock.

A higher New Zealand dollar TWI

• 

Lower imported inflationary pressure.

• 

Persistently higher net immigration due to weakness in global
activity.

• 

House price inflation remaining elevated for longer.

If investors’ preferences for New Zealand dollar assets increases despite
a declining interest rate differential, the exchange rate could remain
higher than assumed. A higher exchange rate would dampen import
prices, and reduce tradables inflation. Furthermore, the higher exchange
rate would weigh on the export and import-competing sectors, while
lower import prices would lead to more imported consumption. Lower
rates would be required to generate stronger domestic demand and
return inflation to target.

• 

Higher household consumption.

Higher funding costs

• 

Further declines in inflation expectations.

Lower risk appetite in financial markets would translate into higher
wholesale funding costs for banks as markets charge a higher price to
compensate for the perceived risk of lending to them. Higher funding
costs would result in mortgage interest rates rising relative to wholesale
interest rates, with the spread between the floating mortgage rate and
the OCR increasing. In such a scenario, the New Zealand dollar TWI
could depreciate, partly due to investors moving funds to traditional
safe-haven economies. In this environment, firms and households
could become less confident about the economic outlook, reducing
consumption and investment. Lower policy interest rates would be
needed to prevent an increase in mortgage interest rates that would
dampen domestic demand and inflationary pressure.

The scenarios that focused on domestic conditions were:

In addition to the ongoing global and domestic risks, the economy is
occasionally affected by idiosyncratic shocks. An example that the Bank
has previously considered is the wider economic effects of a drought that
significantly reduces dairy production.
Figure 5.14 shows the set of interest rate paths implied by these
scenarios, applied to the current central projection. Should these
scenarios, or a combination of these scenarios materialise, the Bank will
revise the path for the OCR appropriately, in either direction, to ensure
inflation trends toward the midpoint of the target range over the medium
term.

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

33

 Lower export prices

House price inflation remains high for longer

A fall in global demand for dairy or a strengthening in global dairy
production could see export prices fall back to low levels. Lower export
prices would flow into the domestic economy through lower national
incomes and a deterioration in confidence. Growth in consumption and
business investment would weaken, reducing capacity pressure. While
a weaker domestic outlook would typically lead to a depreciation of the
exchange rate and higher tradables inflation in the near term, a weaker
outlook for non-tradables inflation over the medium term may mean that
additional monetary policy stimulus is required.

Given strong population growth, a housing shortage in Auckland, and
low interest rates, house price inflation could remain high for longer
than assumed in the projection. Higher house price inflation would
stimulate construction activity and, assuming historical relationships
between house prices and household spending hold, consumption would
increase. Stronger domestic demand and a higher output gap would
generate higher non-tradables inflation and higher interest rates would
be necessary.

Lower global commodity prices
Deterioration in global growth prospects could see world commodity
prices and inflation fall. This would imply lower imported inflation for
New Zealand. It is likely in this environment that prices of New Zealand’s
export commodities would also fall, reducing farm incomes and business
confidence, reducing consumption and investment. The inflation impact
would depend on the exchange rate response and the terms of trade
impact of declines in both export and import prices.

Persistently higher net immigration
If foreign labour markets do not strengthen as assumed, net immigration
could be higher than projected. Net immigration increases domestic
demand, contributing to house price inflation and consumption. Higher
net immigration would also increase labour supply and potential output.
On net, higher net immigration would likely be positive for inflationary
pressure.

34

Stronger consumption
Consumption has not grown as strongly as historical relationships with
house prices might suggest. If this reflects an element of consumer
caution which disappears as the economy continues to strengthen and
consumers become more optimistic, household spending could increase
more than assumed. Stronger consumption growth would add to capacity
pressure, and generate higher non-tradables inflation. In this scenario,
higher interest rates would be required.

Inflation expectations fall further
Inflation expectations are assumed to gradually increase over the
projection as headline inflation increases. If inflation expectations were
to fall further, pulling down long-term inflation expectations, significantly
lower policy rates would be required to generate a stronger output gap
and inflationary pressures to see inflation settle back around the target
midpoint.

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

 Table 5.1
Composition of real GDP growth
(annual average percent change, seasonally adjusted, unless specified otherwise)
Actuals
2012
2013

March year

2009

2010

2011

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

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

Final domestic expenditure
Stockbuilding1
Gross national expenditure

-1.4
-0.3
-1.8

-1.5
-0.7
-1.9

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

-2.8
-3.6
-1.6

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

-1.3
-2.6

1 

Projections
2018
2019

2014

2015

2016

2017

2.4
-0.1
1.8

3.1
2.3
2.9

2.6
2.3
2.6

2.3
1.8
2.2

4.0
2.4
3.6

3.5
1.7
3.1

3.0
0.8
2.5

3.0
6.8
6.0

15.4
3.0
5.7

13.0
5.5
7.2

11.6
9.0
9.6

5.8
1.4
2.5

16.8
5.1
8.1

6.1
7.3
7.0

1.9
3.2
2.8

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

2.2
-0.2
2.0

4.7
-0.1
4.6

4.1
0.2
4.2

2.6
0.0
2.5

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
7.5
3.2

5.7
2.1
3.1

3.8
6.2
3.8

1.6
4.1
3.5

2.7
2.4
2.6

-0.5
1.5

1.4
1.1

2.5
3.0

2.3
1.9

2.8
3.5

3.6
2.9

2.5
3.0

3.7
3.9

3.6
3.1

2.6
2.4

Percentage point contribution to the growth rate of GDP.

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

35

 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
OCR (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
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)

36

Actuals
2012 2013

2014

2015

2016

4.5
2.0
7.9
3.4

1.6
2.1
-2.6
-1.7

0.9
1.8
-4.9
-3.9

1.5
1.7
11.6
-3.1

0.3
1.8
-9.0
-3.3

0.4
1.8
0.1
0.8

1.3
1.6
-0.7
-1.4

1.6
2.0
4.1
2.7

2.1
2.1
2.9
2.0

2.5
66.6

2.8
69.0

2.5
72.2

2.5
74.0

2.5
77.6

3.4
79.3

2.9
72.6

2.0
76.0

1.7
75.3

1.7
74.1

-1.3
1.8
-0.5

-0.5
1.2
-2.3

1.4
1.4
-2.3

2.5
1.6
-1.5

2.3
2.0
-1.2

2.8
2.4
-0.8

3.6
2.7
0.1

2.5
2.8
-0.2

3.7
2.9
0.6

3.6
2.9
1.3

2.6
2.7
1.2

-1.2
5.0
1.1

-0.4
5.9
1.0

1.6
6.0
1.0

0.6
6.3
0.9

0.2
5.7
0.7

3.7
5.5
0.5

3.2
5.4
0.3

2.0
5.2
0.2

5.1
4.7
0.3

2.1
4.5
0.5

1.5
4.5
0.7

-2.1
-7.0
-1.9
-2.1

-3.2
-1.5
-4.5
1.3

-8.9
-2.8
7.9
2.2

-4.3
-3.2
1.6
2.4

-2.0
-3.7
-4.3
2.0

-1.2
-2.6
11.7
1.8

0.2
-3.6
-0.3
-0.7

0.3
-3.1
-3.1
-0.5

0.7
-3.2
0.8
0.0

1.3
-3.2
2.3
0.3

2.0
-2.8
1.2
0.6

0.3
1.6

1.2
2.2

4.5
3.2

3.4
2.7

3.3
2.3

3.5
2.3

3.6
1.0

3.5
1.3

3.3
1.7

3.3
2.1

3.2
2.2

2009

2010

2011

3.0
3.1
7.2
17.4

2.0
1.3
-7.6
-11.1

6.6
65.6

Projections
2017 2018 2019

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