2015 Annual Report
Central banks across the world have found the post-Global Financial Crisis years to be a challenging time for conducting policy. Globally, corporate and household deleveraging has taken longer and been more difficult than anticipated – especially in the euro area.
Over the past year, growth in the developing countries has slowed and global economic growth has averaged around 3 percent, despite the most accommodating monetary conditions the world has ever known. In some of the advanced economies experiencing more rapid growth, there have been puzzles around low wage inflation, weak productivity growth, and sluggish business investment. In asset markets, we have seen bond and equity prices at historic highs, while house prices in many countries have risen rapidly.
Our economy has performed much better than many advanced economies in recent years. GDP growth for the year to March 2015 was 2.6 percent, and employment increased by 3 percent with labour force participation at historically high levels. International forces have had a major influence on our economy. We experienced large declines in commodity prices, net immigration reached record levels, our long-term interest rates declined to low levels, and strong capital inflows meant that our exchange rate has been overvalued relative to long-term economic fundamentals. Our terms of trade were at a 40-year high in June 2014 but, as at August 2015, global dairy prices have fallen 65 percent since February 2014.
Like most of the advanced economies, headline and underlying inflation have been lower than we would prefer. Since the December quarter 2014, annual Consumer Price Index (CPI) inflation has been below the 1 to 3 percent target band, primarily due to the 52 percent decline in oil prices since June 2014, and the continued strength of the exchange rate for much of the year. Non-tradables inflation remained relatively low and stable, averaging under 2.5 percent, reflecting the impact of strong factor accumulation that has expanded capacity, and enabled strong demand growth to be met without increased inflation pressures.
With inflation below the target range, and the exchange rate not adjusting sufficiently to the decline in dairy prices, we amended our policy signals. We lowered the projected interest rate path, discussed circumstances where interest rate cuts might be appropriate, and, in June 2015, cut the Official Cash Rate (OCR). Statistical data revisions suggested that capacity pressures were less than forecast. The decision to cut interest rates was aimed at buffering the decline in the terms of trade and contributing to moving inflation back towards the mid-point of the target range.
We are conscious of the impact that low interest rates and aggressive lending competition among banks can have on housing demand and its potential to feed into house price inflation. We remain concerned about the financial stability risks and risks to the broader economy that would be associated with a major correction in Auckland house prices.
Although a strong supply response over several years is needed to address Auckland’s housing imbalance, we felt that macro-prudential policy could help to reduce the financial stability risks arising from pressures in the Auckland housing market. The proposed loan-to-value ratio (LVR) measures and the Government’s policy initiatives that it announced in the 2015 Budget should begin to ease the impact of heightened investor activity, and help lower the financial and economic risks while important regulatory and infrastructure issues are addressed and additional investment in new housing takes place.
Our May 2015 Financial Stability Report (FSR) focussed on the imbalances in the housing market, the implications of recent developments in the dairy sector for farmer indebtedness, and loose global financial conditions. These will be important themes in the months ahead.
Striving to be a high-performing central bankThe activities of the Bank affect people’s lives in many ways other than through decisions on monetary policy and macro-prudential policy. We provide currency to meet the public’s cash needs, we regulate prudential requirements for banks, other financial institutions and insurance companies, and we provide services to allow financial institutions to settle payments between one another. We recognise that the community must have confidence that we perform to a high standard.
The Annual Report outlines our vision and strategic direction, our core functions, the Bank’s 10 strategic priorities, and the work programmes that flow directly from them. The report discusses success measures, and whether our goals were met.
As was the case last year, we continued to invest heavily in order to strengthen our management, knowledge and technical capability to deliver on our strategic priorities. We invested extensively in our:
- Human resources, and especially managerial and leadership development, and in strengthening the adaptive, collaborative and innovative culture.
- Information systems and data gathering. This included developing new databases, better quality assurance and risk management practices.
- Projects. We have several major projects underway. These include the design and production of new Series 7 Brighter Money banknotes, with the $5 and $10 banknotes due for release to the public in October 2015, followed by the $20, $50 and $100 banknotes in April 2016. We undertook major project work to improve our physical and IT security, renew our payments system infrastructure, and substantially enhance our treasury management systems. We also undertook work preparing for the possible sale of the NZClear securities settlement system.
- During the year, we made considerable effort to enhance understanding of our role and policies. In particular, the Bank maintained an active speech programme – we made 118 presentations, including 17 on-the-record speeches, covering the length and breadth of the country. We delivered briefings to political caucuses and key media, and conducted an extensive stakeholder survey using external consultants. The results of the survey were encouraging while also offering insights into how we might achieve even greater levels of familiarity and trust among stakeholders.
Going forward, the Bank will have a tight budgetary framework. The Five-year Funding Agreement with the Minister of Finance, which commenced on 1 July 2015, provides for an annual increase of 1.3 percent in funding levels. In order to prepare for this tight budget, the Bank reviewed its staffing levels and a net 15 positions were made redundant early in 2015.
It has been a challenging but highly rewarding year for the Bank in undertaking policy and delivering on our strategic priorities. I wish to thank the Board for its support and advice, and particularly Dr Rod Carr for his strong leadership. I also wish to thank my fellow Governors for their support, guidance, and excellent teamwork, and colleagues throughout the Bank for their dedication and professionalism in helping to ensure that the Bank performed to a high standard in meeting its responsibilities.
25 August 2015