New Zealand’s central bank left its current monetary policy stance steady, including its key interest rate and asset purchase program, but dropped its previous guidance of being ready to lower the rate further as its confidence in the economic outlook is improving.
The Reserve Bank of New Zealand (RBNZ) kept its Official Cash Rate (OCR) at a rock-bottom 0.25 percent, unchanged since March last year when it was lowered to support economic activity that was being hit hard by the COVID-19 pandemic.
Since June 2015 RBNZ has been in a monetary easing cycle and cut its rate 10 times by a total of 325 basis points, including last year’s 75 point cut in March.
In addition to last year’s rate cut, the central bank has also been purchasing assets to keep long-term interest rates low under its Large Scale Asset Purchase program – a $100 billion limit by June 2022 – and in November last year launched a Funding for Lending Program (FLP) to provide additional monetary stimulus.
RBNZ also began working with financial institutions to prepare them for the possibility of lowering interest rates to negative levels and wrapped up this work in February.
In its previous policy statement in April RBNZ confirmed it was still ready to lower OCR if needed.
Today, however, the bank’s monetary policy committee dropped this reference of being “prepared to lower the OCR if required,” replacing it with a pledge to maintain the current monetary settings until it is confident inflation is near its 2 percent target and that employment is at its maximum sustainable level.
”Meeting these requirements will necessitate considerable time and patience,” RBNZ said.
The basis for the central bank’s shift in tone reflects the economic recovery worldwide, aided by unprecedented monetary and fiscal stimulus in the wake of the pandemic, and the roll-out of vaccines.
“Confidence in the outlook is rising as the more extreme negative health scenarios wane given the vaccination progress globally,” RBNZ said.
The central bank’s shift toward a normalization of monetary policy mirrors that seen in several other countries, including the Bank of Canada, which has begun to trim its asset purchases, and rate hikes by central banks in emerging and frontier markets, most notably Russia, Brazil, Turkey and Iceland, to curb rising inflationary pressures.
However, as illustrated by events in India, COVID-19 remains a threat and RBNZ said it was still cautious given the ongoing virus-related restrictions in activity, the unevenness of the economic recovery and the weak level of business investment.
Nevertheless, in its latest monetary policy report RBNZ raised its outlook for economic growth in coming years and penciled in the first increase in its key interest rate by September 2022, with consecutive increases through June 2024.
OCR is seen averaging 0.3 percent this year and next year, but then rising to 0.6 percent in 2023 and 1.4 percent in 2024.
While RBNZ lowered its forecast for gross domestic product for the year beginning in March to shrink by an average of 3.1 percent from February’s forecast of 2.4 percent contraction, growth in 2022 is now seen of 4.4 percent, up from 3.8 percent, and then 3.5 percent5 in 2023, up from an earlier 3.2 percent.
Echoing the U.S. Federal Reserve, RBNZ expects the recent pickup in inflation to be temporary and ease over the course of the year.
On average RBNZ forecast headline inflation of 1.5 percent this year, down from its February forecast of 1.7 percent, before rising to 1.7 percent in 2022, up from 1.5 percent.
For the 2020 March year, New Zealand’s headline inflation rate averaged 2.5 percent and GDP averaged 1.7 percent.
The Reserve Bank of New Zealand issued the following press statement and a summary of its policy meeting:
“Tēnā koutou katoa,
The Monetary Policy Committee agreed to maintain the current stimulatory level of monetary settings in order to meet its consumer price inflation and employment objectives. The Committee will keep the Official Cash Rate (OCR) at 0.25 percent, and the Large Scale Asset Purchase and Funding for Lending programmes unchanged.
The global economic outlook has continued to improve, with ongoing fiscal and monetary stimulus underpinning the recovery. New Zealand’s commodity export prices have benefited from this rise in global demand. However, divergences in economic activity, both within and between countries, remain significant. The sustainability of the global economic recovery remains dependent on the containment of COVID-19.
The near-term economic data will continue to be highly variable. While economic growth in New Zealand slowed over the summer months following an earlier strong rebound, construction activity remains robust. The aggregate level of employment has also proved resilient, while fiscal spending continues to support domestic economic activity.
However, tourism-related business activity continues to be affected by the absence of international visitors, with the recent opening of Trans-Tasman travel expected to only partially offset revenue losses. The extent of the dampening effect of the Government’s new housing policies on house price growth and hence economic activity will also take time to be observed.
Overall, our medium-term outlook for growth remains similar to the scenario presented in the February Statement. Confidence in the outlook is rising as the more extreme negative health scenarios wane given the vaccination progress globally. We remain cautious however, given ongoing virus-related restrictions in activity, the sectoral unevenness of economic recovery, and the weak level of business investment.
A range of international and domestic factors are currently resulting in rising costs for businesses and consumers. These factors include disruptions to global raw material supplies, higher oil prices, and pressure on shipping arrangements. These price pressures are likely to be temporary and are expected to abate over the course of the year.
The Committee noted that medium-term inflation and employment would likely remain below its Remit targets in the absence of prolonged monetary stimulus. The Committee also noted that while the low interest rate environment has supported house prices, other factors such as recent tax changes, the growing supply of housing, and lending restrictions, are providing offsetting pressures.
The Committee agreed to maintain its current stimulatory monetary settings until it is confident that consumer price inflation will be sustained near the 2 percent per annum target midpoint, and that employment is at its maximum sustainable level. Meeting these requirements will necessitate considerable time and patience.
Summary Record of Meeting
The Monetary Policy Committee discussed economic developments since the February Statement, and their implications on the outlook for inflation and employment. The Committee noted the ongoing improvement in global economic activity and the associated rise in long-term wholesale interest rates. Fiscal and monetary stimulus are continuing to underpin the global recovery. However, the varied pace of national vaccination programmes, and the re-introduction of COVID-19 containment measures in some countries, means that the growth outlook remains uncertain, and uneven within and across countries.
Economic activity in New Zealand has returned to close to its pre-COVID-19 level. The increase in economic activity has been supported by ongoing favourable domestic health outcomes. This has led to a catch up in consumer spending, supported by substantial monetary and fiscal stimulus. Improving global demand and higher prices for New Zealand’s goods exports are also contributing to economic activity.
The Committee discussed the key factors underpinning the economic recovery and agreed that the outlook was unfolding broadly as outlined in the February Statement. The improvement in global and domestic economic indicators, such as New Zealand’s terms of trade, have provided members more confidence in this outlook. However, the Committee agreed on the need for caution as domestic activity remains uneven across sectors of the economy.
The Committee noted areas of the economy where business activity levels remained low. The sectors most exposed to international tourism remain weak, despite the recent re-opening of travel with Australia. Business investment also remains below its pre-COVID-19 level, although recent indicators of investment intentions suggest signs of recovery.
The Committee noted that the level of employment has remained resilient. Reports of specific skill and seasonal worker shortages have the potential to put upward pressure on some wage costs. The economy is experiencing pockets of both labour shortages and employment slack, consistent with the economic disruption caused by COVID-19.
The Committee agreed that, in aggregate, the current level of employment remains below their estimates of the maximum sustainable level but expect it to converge to that level over time. They also expect to see wage growth lift as firms compete for labour, in particular given the current low levels of immigration.
The Committee noted that underlying CPI inflation currently remains slightly below their target midpoint of 2 percent per annum. A range of domestic and international factors are expected to lift headline inflation above 2 percent for a period. Members noted these factors are expected to be temporary and include higher international transport costs, disruptions to global raw material supplies and resulting higher prices for many commodities, and administrative charges.
The Committee discussed the risk that these one-off upward price pressures may promote a rise in more general inflation and inflation expectations. However, the Committee agreed that these risks to medium-term inflation were mitigated by ongoing global spare capacity and well-anchored inflation expectations.
The Committee assessed the effect of its monetary policy decisions on the Government’s objective to support more sustainable house prices, as required by its Remit. It was noted that the current level of house prices result from a range of factors including low global and domestic interest rates, housing supply shortages, land use regulations, and strong investor demand.
However, the Committee acknowledged that some of the factors supporting house price growth have eased. In particular they noted the current high rate of housing construction, historically low population growth, increased loan-to-value ratio restrictions, and the Government’s recent changes to housing tax and supply policies. These factors place downward pressure on the longer-run level of sustainable house prices and are consistent with a period of significantly lower house price growth.
The Committee noted risks remain to economic growth both on the upside and downside. However, they expressed greater confidence in their outlook for the economy given the reduced risk of extreme downside shocks to the economy from COVID-19.
The Committee noted that on current projections the OCR eventually increases over the medium term, but agreed that this is conditional on the economic outlook evolving broadly as anticipated. In line with their least regrets framework, members reinforced their preference to maintain the current level of monetary stimulus until they were confident that the inflation and employment objectives would be met. They agreed this would require considerable time and patience.
The Committee discussed the effectiveness of monetary policy settings since the February Statement. The Committee noted staff advice that the LSAP programme has provided substantial monetary policy stimulus to date.
Staff noted that reduced government bond issuance was placing less upward pressure on New Zealand government bond yields. This also provided less scope for LSAP purchases with the limits outlined in the letter of indemnity, specified as a percentage of government bonds outstanding. Based on current Treasury projections for the issuance of New Zealand government bonds, the Committee acknowledged that the LSAP programme could not reach the $100bn limit by June 2022. Members affirmed that this dollar figure was a limit, not a target.
Members endorsed staff continuing to adjust weekly bond purchases as appropriate, in particular taking into account market functioning. The Committee agreed that weekly changes in the LSAP purchases do not represent a change in monetary policy stance, and that any desired change in stance would be made via the usual Monetary Policy Committee communication channel.
The Committee agreed that the OCR is the preferred tool to respond to future economic developments in either direction.
The Committee agreed to maintain its current stimulatory monetary settings until it is confident that consumer price inflation will be sustained near the 2 percent per annum target midpoint, and that employment is at its maximum sustainable level. The Committee agreed it will take time before these conditions are met.
On Wednesday 26 May, the Committee reached a consensus to:
- hold the OCR at 0.25 percent;
- maintain the existing LSAP programme; and
- maintain the existing Funding for Lending Programme (FLP) conditions.”