2016 Briefing to the Incoming Minister
Overview of the Reserve Bank of New Zealand
The Reserve Bank manages monetary policy to maintain price stability, promotes the maintenance of a sound and efficient financial system, and supplies New Zealand banknotes and coins.
Role and accountability
- To achieve these outcomes, the Bank’s functions cover: monetary policy formulation; financial market operations; macro-financial stability; prudential supervision; settlement services; and currency operations. These functions, the outcomes that the Bank targets, and the measures used to evaluate performance are described in the Bank’s Statement of Intent and Annual Report.
- Appendix 3 details the significant powers and responsibilities of the Minister of Finance, the Reserve Bank, and the Reserve Bank Board, under the Reserve Bank Act 1989, the Anti-Money Laundering and Countering Financing of Terrorism Act 2009, the Insurance (Prudential Supervision) Act 2010, and the Non-Bank Deposit Takers Act 2013.
- Section 9 of the RBNZ Act requires that the Minister shall fix, in agreement with the Governor, policy targets for monetary policy. This is required whenever a Governor is re/appointed. Also, the Minister and Governor may “from time to time” review or alter the PTA. Any alterations must be recorded, tabled at the Board, and gazetted.
- The Reserve Bank keeps the Minister and the Treasury informed on the economic outlook, policy developments and other significant matters affecting the Bank. We provide regular briefings on the economy ahead of each Monetary Policy Statement. We meet regularly with the Minister and Treasury, providing information and seeking the Minister’s input, on proposed regulatory policy developments. Under the Memorandum of Understanding on Macro-Prudential Policy (MOU) the Bank is required to keep the Minister and Treasury informed about its thinking on macro-prudential policy developments, and to consult the Minister prior to any decision to deploy macro-prudential policy instruments. We provide copies of our on-the-record speeches to your office 1-2 days prior to delivery and inform you confidentially (by telephone) of our OCR decision and accompanying statement an hour before it is released.
- The Bank has a Five-year Funding Agreement with Government. The current Funding Agreement covers the five-year period ending 30 June 2020, and provides funding of $69.5 million for 2016/17.
Environment and Major policy initiatives
- Appendix 1 provides a copy of a speech delivered on 8 December, covering the Bank’s most recent view of the New Zealand economy and implications for monetary policy.
- In many respects, the economy is performing well. The economic expansion is in its eighth year. Our November 2016 Monetary Policy Statement forecasts show annual real GDP growth of around 3¾ percent over the next 18 months, with inflation approaching the mid-point of the target band, the unemployment rate continuing to decline, and the current account deficit remaining within manageable levels. The low point for CPI inflation has probably passed. Supported by the improvement in global commodity prices in recent months, we expect the December quarter 2016 CPI data to confirm that annual CPI inflation is moving back within the 1 to 3 percent target band.
- House price inflation in Auckland has softened in recent months but it is uncertain whether this will be sustained. House price to income ratios in the region remain among the highest in the world and prices are continuing to rise rapidly in the rest of the country. There is a significant risk of further upward pressure on house prices so long as the imbalance between housing demand and supply remains.
- In the absence of major unanticipated shocks, prospects look good for continued strong growth over the next 18 months, driven by construction spending, continued migration, tourist flows, and accommodative monetary policy. Supply disruptions associated with the Kaikoura earthquake are unlikely to have a major impact on overall economic growth, while some increase in freight costs and construction cost inflation is likely.
- The greatest threat to the expansion lies in possible international political and economic developments and their implications for the global trading environment. The main domestic risk – and one that could be triggered by developments offshore – is a significant correction in the housing market. Numerous measures indicate that New Zealand house prices are significantly inflated relative to usual valuation indicators.
- The Bank lowered the Official Cash Rate to an historic low of 1.75 percent in November and indicated that monetary policy will continue to be accommodative. As has been the case in several other countries, monetary policy has been made more challenging in New Zealand by low global inflation and zero or negative policy rates in several major economies. This has put downward pressure on our interest rate structure and contributed to asset price inflation and upward pressure on the New Zealand dollar. This trend may finally be turning.
- At this stage, global and domestic developments do not cause us to change our view on the direction of monetary policy as outlined in the November MPS. We expect monetary policy to continue to be accommodative, and that the projected policy settings will help generate sufficient growth to have inflation settle near the middle of the target range. The next Official Cash Rate decision is scheduled for the 9 February 2017 Monetary Policy Statement.