Official Cash Rate to remain restrictive

The Monetary Policy Committee today agreed to keep the Official Cash Rate at 5.50 percent.

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Statement of Intent 1 July 2015 - 30 June 2018

Reserve Bank of New Zealand

Environmental setting

New Zealand’s economy continues to grow at an annual rate of around 3 percent, reflecting low interest rates, high net immigration, rising construction activity and a decline in fuel prices since mid-2014. However, headwinds to growth include a softening in the Chinese and Australian economies, a sharp fall in dairy incomes and the persistence of the New Zealand dollar at unjustifiable and unsustainable levels.

Lower fuel prices, a high exchange rate and low global inflation have seen annual CPI inflation fall below the Reserve Bank’s 1 to 3 percent inflation target in the past year. Inflation is expected to pick up as the effect of lower fuel prices diminishes and economic growth gradually exhausts available capacity. The Bank’s goal is to ensure future inflation is within the target band on average over the medium term, with a focus on keeping future average inflation near the 2 percent target midpoint. It seeks to do this while avoiding unnecessary volatility in output, interest rates and the exchange rate.

House price inflation has been elevated in Auckland and prices are stretched relative to incomes and rents. The Bank has proposed adjustments to loan-to-value restrictions in light of the increased financial stability risks if house prices were to drop sharply.

The prudential framework has evolved significantly since the Global Financial Crisis and the Bank is continuing to strengthen it. A stocktake of the prudential requirements relating to banks and non-bank deposit takers is underway with the aim of improving the efficiency, clarity and consistency of prudential requirements.

The Reserve Bank continually seeks to strengthen its performance and meet the challenges and demands of the environment in which it operates. The Bank has reached a new 5-year funding agreement with the Minister of Finance under which its funding level will increase by an average of just 1 percent a year over the next five years. The Bank has identified avenues for cost savings and for using its resources more effectively. This process has meant a small reduction in staff numbers and is leading to changes in the Bank’s business processes and culture that will help it become more innovative and responsive in delivering on its objectives.

The Bank adopted 10 strategic priorities for 2015–18 to enhance its capacity to respond to this challenging environment. Many of these strategic priorities run across several functions and departments.

These strategic priorities, which are described in more detail on pages 12-14, are framed around three broad themes:

  • continuing to strengthen the Bank’s performance;
  • developing a more integrated Bank approach to the Bank’s policies; and
  • improving infrastructure and reducing enterprise risk.

Informing Government

The Bank keeps the Minister of Finance regularly informed about its thinking on significant policy developments, especially where Cabinet decisions, legislation or regulation may be required. This involves providing substantive information and discussion of the rationale for any changes, and their potential economic and fiscal impacts at the earliest possible stages of policy development, including timely engagement with Treasury officials. The Bank also provides assessments of the expected regulatory effects of proposed policy developments.

This information includes:

  • Macro-economic policy in the coming economic cycle, including the implications of global economic and financial market developments. It also covers issues relating to the Bank’s implementation of monetary policy and policies directed toward financial stability, and their interaction with fiscal and wider policy settings as well as analytical contributions that deepen understanding of New Zealand’s economic performance and macroeconomic imbalances.
  • Macro-prudential policy and the effectiveness and development of macro-prudential tools, and consultation on developments in accordance with the Memorandum of Understanding agreed in 2013.
  • Opportunities to improve the quality and effectiveness of regulations administered by the Reserve Bank.
  • Activities that support a well-functioning financial system, including the ongoing suitability of prudential supervision and policies aimed at increasing the safety of the New Zealand financial system.
  • Risks to the Crown balance sheet that might arise from the failure of a financial institution and the bedding in of reforms that mitigate the Crown’s exposure to the financial sector, including Open Bank Resolution (OBR).
  • Ongoing close collaboration with the Reserve Bank’s Australian stakeholders on matters related to the financial system, supervisory oversight and prudential policies.

Graeme Wheeler

Grant Spencer
Deputy Governor