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Monetary Policy Statement February 2023

Reserve Bank of New Zealand

Monetary Policy Statement February 2023
Monetary Policy Statement February 2023

Latest key statistics

Q3 2022

Annual Average economic growth:

2.7%
Q4 2022

Annual inflation:

7.2%
Q4 2022

Unemployment rate:

3.4%

Media conference

Watch the February 2023 Monetary Policy Statement media conference

Governor Adrian Orr:

Kia ora ano tatou tēnā koutou Welcome to Te Pūtea Matua, the Reserve Bank of New Zealand. And today with me up here on stage, I have Karen Silk, Assistant Governor, and Paul Conway, our chief economist, and pleased to say we also have the full Monetary Policy Committee with us here in the room. I do want to say just from the outset that on behalf of all the people at the Reserve Bank, I want to acknowledge the many thousands of people across the Upper North Island who have been seriously affected in recent days by the floods and have been suffering as a result. We recognise that this is a very hard time for many, especially those who have lost loved ones. Our thoughts are with you and we salute all of those who are helping out from the bank.

We have been working with our industry colleagues to ensure that there's access to cash in the affected areas. We've also been in close liaison with the insurance companies and the banks to make sure they are both operationally and financially able to continue to provide the services and support their customers in these times of need. I do want to thank all of the industry participants for working with us, particularly around the cash access and a big shout out to thank the police and the Defence Force for assistance in our mahi as well. He Waka Eke Noa. We're all in this boat together.

Today, the Monetary Policy Committee increased the official cash rate from 4.25 to 4.75%. The committee agreed that the official cash rate still needs to increase, as was indicated in our November statement, to ensure that inflation returns to within our target range over the medium term. While there are early signs of price pressures easing, core price inflation remains too high, employment is still beyond its maximum sustainable level, and near term inflation expectations remain elevated. Cyclone Gabrielle and other recent severe weather events have had a devastating effect on the lives of many New Zealanders, and it is too early to accurately assess the monetary policy implications of these weather events, in particular, given that the scale of the destruction is really just unfolding with us now.

The timing, size, and the nature of funding of any government fiscal response is still yet to be determined. However, the committee's current assessment is that over the coming weeks, prices for some goods are likely to spike and activity will be weaker than previously expected. Export revenues will be negatively impacted. Monetary policy, of course, is set with a medium term focus and the committee will look through the short term output variations and direct price effects. In time, the infrastructure and community rebuild will add to activity and inflation pressures, especially given the existing capacity constraints in the economy.

Internationally, core inflation remains high and inflationary pressures are remaining broad based. However, as discussed often, the outlook for global economic activity through 2023 remains subdued, which is acting to lower consumer price pressures as well as lowering demand for New Zealand's key commodity exports. Continued growth and services exports from New Zealand will provide some export revenue offset.

Domestically, demand remained robust throughout 2022 unpinned by resilient household spending, construction activity, government spending, and the swift recovery in international tourism with our borders reopening. Labour shortages remain a significant constraint on economic activity, contributing to heightened wage inflation. And we note that people are moving jobs at a very elevated pace, which is indicative of the tight labour market in New Zealand in strong demand.

As mentioned, while there are early signs of demand easing, it continues to outpace supply in the economy and this is reflected in the strong domestic inflation pressures. The committee agreed that monetary conditions need to tighten further as indicated in our November statement so as to be confident that there is sufficient restraint on spending to bring inflation back within its 1% to 3% target range. The committee remains determined, resolute even in achieving its monetary policy mandate. Thank you very much and we're now open for questions.

Ben McKay:

Good day. Ben McKay from Australian Associated Press. Just so Kiwis know what's coming, what exactly is going to spike in price because of Cyclone Gabrielle, as you've suggested?

Governor Adrian Orr:

Paul, do you want to talk about the near term price?

Paul Conway:

Sure. So as the governor mentioned, we anticipate some price spikes and essentially things that have been destroyed by the cyclone and need to be replaced quickly. So used cars, I guess would be an obvious example. Appliances that have been in water and subsequently destroyed. Furniture, furnishings, carpet, that sort of stuff. We're expecting to see price hikes in that over the coming weeks and months. Can I just add, it's really important that people and businesses don't use that as an opportunity to increase real wages or real profits off the back of this disaster. Otherwise that will just embed inflation in our economy and equal higher interest rates down the track.

Governor Adrian Orr:

And in the list, I'd add food prices as well. [inaudible 00:06:30].

Paul Conway:

Yeah. All the stuff that's been hit on the supply side as well. So obviously a lot of export crops have been wiped out. Food prices. Fruit and vegetable prices in particular.

Tom Pullar-Strecker:

Tom Pullar-Strecker from Stuff. Do we still need a bank engineered recession?

Governor Adrian Orr:

Our view is that demand has to slow considerably to meet supply, to remove inflation pressures. Given the current growth rates, we are still projecting the economy to contract by around 1% over about a 9 month to 12 month period. So we are still projecting a recession.

Eric Frykberg:

Eric Frykberg from Good Returns. How much pressure were you under, if any, to not move on the OCR as Kiwibank said perhaps you shouldn't because of the storm?

Governor Adrian Orr:

The committee formed a strong consensus that we need to do the right thing by our remit. The business cycle is such that inflation pressures are very strong and inflation is too high. So the direction of our official cash rate was straightforward. The worst thing that could happen is that people are struggling both through these tough times and with high inflation. It's not an and or question.

Jenna Lynch:

Jenna Lynch from Newshub. How much more pain are homeowners going to face? How much higher will you go?

Governor Adrian Orr:

So you're talking mortgage?

Jenna Lynch:

[inaudible 00:08:03].

Governor Adrian Orr:

Because households are savers as well and some are borrowers and our projections are for the official cash rate. At the moment, we have it peaking at around 5.5% sometime over the course of the next six months, 12 months. But of course we're back every six weeks reassessing that. I will say, and we do have to remind people, which is often missed in the media, that that forward curve is already priced into current mortgage interest rates. This is not used to banks. This is priced into the market and I think it's important that's understood. What we are calling out across the banks is they have been very quick to increase their mortgage lending rates, but deposit rates have lagged behind and bank margins are holding up. Higher deposit rates are a critical part to encourage savings, which takes inflation pressure out of the economy.

Jenée Tibshraeny:

Jenée Tibshraeny from the Herald. Two questions. Just on the back of your answer there, Governor. By how much do you expect mortgage rates to rise from here? Or do you think they are largely priced in?

Governor Adrian Orr:

The forward curve, what I saw just before coming here has barely moved. If it was a high dive, we would've scored a 10. There was absolutely no splash. So yes, these are priced in. We would like to see movements in the deposit rates.

Jenée Tibshraeny:

Okay. And secondly, this might be a premature question, but how open would you be to slowing your quantitative tightening? Should there be some problems in the bond market, and should the bond market struggle to absorb all the additional issuance that'll be required?

Governor Adrian Orr:

An important part of our role beyond just setting the monetary policy is working to make sure financial stability and market operations, so we remain open always to being able to meet whatever the events that are in front of us as displayed over recent years.

Luke Malpass:

 Governor. Luke Malpass from Stuff. Just wondering-

PART 1 OF 4 ENDS [00:10:04]

Luke Malpass:

Kia ora Governor. Luke Malpass from Stuff. Just wondering, or hoping I can get some reflections from either you or your team on, are you seeing any differences coming through in the international labour market? Are we seeing immigration get a bit looser? Any sort of signs of green shoots, bit more supply coming in? Or is it more or less the same as last time?

Governor Adrian Orr:

I believe it's the same as what we've been seeing. The economy has been unfolding uncannily as we anticipated over recent months until the severe weather events of recent and we have a projection of a net inward migration pool of...

Paul Conway:

I don't have the number off the top of my head, but yes, becoming net positive.

Governor Adrian Orr:

Around 20,000 over the next 12 months and so on and so forth. I think we're peaking up at over 40,000, Rebecca? Yeah, so anyway, we're coming back to a strong net inward migration process.

Speaker 1:

Hi, Matthew Brockett from Bloomberg. Your forecasts still show the OCR peaking at 5.5%, but a little later this year than you previously had it. Are you considering, or is there a chance that you could further slow the pace of tightening? So back down to 25 point steps for example, to give yourself a little more leeway in terms of assessing the incoming data?

Governor Adrian Orr:

Without doubt, we have been working hard to make sure the committee has all options available to them or as many options as available. And so absolutely 25, 50, 75 point movements are on the table every time we come to talk.

Speaker 2:

Alistair Powell from Reuters, you said you considered 50 and 75 basis points. Just to clarify, were those the only two options you considered? And if so, how long did you spend on discussing 75 basis points relative to 50?

Governor Adrian Orr:

So as I mentioned, all options are on the table, but most times we've spent focused around that 50 or 75 point discussion balance.

Speaker 3:

Sorry, the balance from a decisioning perspective was very heavily weighted towards 50 basis points. Reflecting that we have seen some early signs in easing. But the shape of the curve and retention of the peak and the track also reflects that we continue to still see a tight economy and some upside risk can't be batted away either.

Governor Adrian Orr:

And I think I would like to add, collecting my thoughts. We have come a long way and fast with our official cash rate. And so now that we are confident we are in a restrictive position, we are afforded more time to reflect on whether we're seeing the outcomes we are hoping to see by now. So we're in a much more flexible position.

Speaker 4:

Rebecca Howard from Business Desk. Just around that point, given how fast you've moved and also the fact that you did say monetary policy is now contractionary, did you think about the possibility of pausing, given the uncertainty of the impact of these weather events? I just think back to the earthquake in Christchurch and the reaction of the Central Bank at the time was quite different.

Governor Adrian Orr:

Yes. And so were the economic contexts-

Speaker 4:

Yeah.

Governor Adrian Orr:

When that earthquake happened. And so it's important for people to understand that this terrible event, events, have been occurring at a time when the economy was already in a very tight capacity situation and high inflation. So that made our decision easier in terms of what we needed to do, no easier in delivering. I would love monetary policy to be able to resolve all challenges in the world, but this is primarily a fiscal and private sector challenge ahead of us.

Speaker 5:

Governor, prior to Christmas you made some remarks about encouraging New Zealanders to pull back on their spending and contribute-

Governor Adrian Orr:

Cool your jets.

Speaker 5:

Cool your jets were the words. How do you think that has been? Do you think New Zealand has done that? And are you pleased with the response New Zealanders are having to your policy I suppose?

Governor Adrian Orr:

We've got in here words like early, we had tentative. These important discussions we have. There are early signs that spending is easing, but they are very early signs against a much higher pressured situation. Of course, in between time we now know there's going to be an increased demand as we rebuild communities in parts of the country. So yes, early signs, but a long way to go.

Speaker 6:

Lucy Kramer from Reuters. What do you think, how big an impact is the floods and the cyclone going to have on the employment market? And are you concerned that we're going to start to see increased wage inflation?

Governor Adrian Orr:

Paul, do you want to talk through that?

Paul Conway:

Well as the Governor said, these terrible events have happened in the context of an economy that is seriously capacity constrained, including in the labour market. Obviously demand for labour and for capital has increased in parts of the country that have been suffered the effects of this cyclone. So the potential is certainly there for it to lead to higher wage inflation. I think the challenge for us as a country is how do we divert resources into the rebuild, without sparking inflation in other parts of the economy? Which isn't much of an answer to your question because there's so much we don't know about this event yet. We don't even know the full scale of the destruction, we don't have the details of the Government's response. We don't know how that's going to be funded. So sorting out how it's going to show up as a kind of demand shock or a supply shock, we'll learn more over coming weeks.

Governor Adrian Orr:

And I would say, and it's in our record of the meeting, the construction sector, we have projected to slow rapidly over the next 12 to 18 months. That's been the real engine room of spending. I would say now we still have that central projection, but the risks aren't all to one side now. We are hearing from business about the forward order book looking very empty, that's the risk for the downside. But guess what? There's going to be an enormous demand for resources in other regions of the country now. So it's the ability of those resources to shift is critical.

Speaker 7:

Thank you.

Speaker 8:

Hi, I'm Larissa Howie from TVNZ. You said that we've got a long way to go before we see inflation starting to ease. Do you know when we can expect to start seeing that?

Governor Adrian Orr:

Yes. Well, I believe it's started now, but [inaudible 00:17:10] 0.2% inflation rate. Near term price pressures are going to remain elevated, we're talking 7.3 for the first quarter of this year, the quarter we're currently in. But after that we have projected inflation falling quite rapidly. 5% by year end and back in the middle of the band, back under 3% by-

Paul Conway:

'24.

Governor Adrian Orr:

Mid next year. So we would've been saying we believe it has peaked now. It is bound to be held up temporarily again because of these one-off price spikes, but aggregate demand and core inflation, the bits that we can most influence will be easing through time.

Speaker 8:

And just given the impacts of all these weather events over the past month or so, how much consideration was given to a 25 basis point hike?

Governor Adrian Orr:

Very little. I mean the real discussion was 50 or 75. And as I mentioned, the economy had been evolving largely as we'd anticipated back in November, up until these events. We're starting from a position of high inflation and capacity constraints. That is the challenge the country has.

Speaker 7:

Gyles Beckford from Radio New Zealand. Just going back to your earlier comments about banks holding up their margins and the slow increase in deposit rates. Do you see banks as actually lining their own pockets at the moment? Unreasonably so.

Governor Adrian Orr:

I think banks are operating competitively, commercially, and that's the outcome we're seeing. We note that it doesn't always have to be one-sided equation when interest rates go up. Yes, mortgage borrowing might cost more, but savers should be better rewarded.

Speaker 7:

And just in terms of the fiscal impulse that will come from Government spending on the disaster recovery. Given that you are looking through the impacts of the weather because of the median term focus that you have, will you similarly look through the Government fiscal impulse that will arise as a result?

Governor Adrian Orr:

Yeah, so it depends on what the government does. So there's the scale, the timing, and the means by which they fund that additional spending. Three very critical variables, we know. What do we have in our projections at the moment? We have about a 1% higher than otherwise GDP profile because of the increased activity that will have to happen during the rebuild of the communities. Now that 1% additional GDP is spread out over coming years. So it's not like you see a one-off peak. Literally the capacity pressures in the country are now that you could throw as much money at it as you could. It would be really struggling to actually do anything with it. It's about getting the resources. So that's the way in which we've done it, around a 1%-

PART 2 OF 4 ENDS [00:20:04]

Governor Adrian Orr:

So, that's the way in which we've done it. Around a 1% additional GDP, scaled against other similar types of shocks and fiscal impulses. And we think that is, we are being honestly approximate to at least say, this is our first guesstimate.

Richard Harmon:

Richard Harmon, Politic. With respect to the government funding of the cyclone, would it make your job easier if a substantial amount of that funding came from taxation, in terms of the impact on inflation?

Governor Adrian Orr:

Re-prioritisation of current spending and revenue raising through other alternatives, makes the job of monetary policy easier. Because it's redirecting current income rather than creating new cash in the economy.

Tom Pullar - Strecker:

Tom Pullar-Strecker from Stuff again. I'm not sure if this is a question for Paul or for yourself, Adrian, but-

Governor Adrian Orr:

We'll give it to Karen.

Tom Pullar - Strecker:

Okay, sounds good. Karen, are you getting metrics at all that I guess might not be in the public domain at the moment, about the impact of the cyclone in terms of damage to productive capacity, agriculture or the cost of the rebuild? Are you seeing anything that we might not be aware of, or are we all sort of flying blind at this point?

Karen Silk:

Look, I think it's still, there's a reasonable degree of uncertainty that's sitting out there. There are areas that people haven't even got access into, so it's quite difficult. Businesses are getting in, we do know that businesses are getting in, and quickly assessing and adapting as fast as they can to try and preserve as much of their productive capacity as they can. How that plays out, we won't know for the next few weeks.

Governor Adrian Orr:

I can say no one's flying blind here. We are talking about the degree of accuracy, as opposed to what we can see. We are heavily plugged into the whole government effort, which is significant across all of the different agencies. As well as through the insurance side, very, very closely working with them. And the banks of course, plus sectoral GDP, and origin of exports, and production are all well known to us. So we've been making lots of estimates and envelopes, but from publicly available information really.

Tom Pullar - Strecker:

Yeah, thank you. I should say I addressed it to Paul just because I thought it might be a forecasting issue. I wasn't trying to ignore you, Karen. Thank you.

Bernard Hickey:

Bernard Hickey from The Kaka. Governor, the Monetary Policy Committee wrote that fiscal policy risks were skewed to the upside. Could you tell us what skewed to the upside means, in terms of potential scale of skew and what the bank might have to do in response if that happened?

Governor Adrian Orr:

I think that statement would've been there even in the absence of the recent severe weather events. In the projections, the [inaudible 00:23:11], sorry about my acronyms, projected a decline in government consumption as a percent of GDP. That is a significant task for any government. And it's certainly a significant task in an economy that has high inflation, because even to deliver the same level of real services means more spending. So, real restraint is their projection. That comes with challenges such as unanticipated events, which we've got. The risk is always hard to deliver on, the re-prioritisation. And you get these shocks, which in this case is a negative shock to economic activity, which will need a government response.

Bernard Hickey:

Just separately on the causes of inflation, how much of a factor is the widening of profit margins by companies, be it state owned or private, in the inflation that we've seen in the last couple of years? Because I see the Kansas City Fed put out a paper showing that half the inflation in the United States in 2021 was because of rising profit margins. What's the story here?

Governor Adrian Orr:

I'm unaware of the Kansas research, but Paul?

Paul Conway:

I think we're little... the data around profits in the New Zealand economy is lacking, so it's much easier to see these types of dynamics in wages. But just because there's a lack of data doesn't mean there's a lack of an issue there as well. Which is why before, I talked about real wages and real profits being potential drivers of inflation, if you're trying to keep ahead of the price spikes caused by the cyclone. I think it's an excellent question, and I would love to have a really strong answer to it. But unfortunately the data doesn't allow it at present, and it's something I hope to rectify going forward.

Governor Adrian Orr:

And we're a developed, functioning economy as is the US. We're in similar cyclical positions, so I would struggle why it would be that much different here.

Bernard Hickey:

And just finally, on the longer term prospects for inflation, given we've had this example of what climate change can do, how soon does climate change factor into your inflation view? Given your median 18 months, two years or so, it seems to be happening quite quickly. And what impact do you think that might have on inflation in the longer run, and therefore the Reserve Bank's actions in response?

Governor Adrian Orr:

First and foremost, to our target range, it should have no impact. Inflation is no one's friend, there's no point putting the target up because inflation may be more often. This is about consumer prices. But sitting in behind it, and we published research on the impacts, the things we would need to think about, the first one of course is increased demand in the adaptation transition for particular goods and services. Increased economic activity around that adaptation going on. But most of those are what I would call relative price shifts. They don't have to turn into aggregate inflation. The relative price of some goods and services will be rising relative to other goods and services. It doesn't mean generalised inflation. That's the real challenge. And of course, how that impacts on our neutral interest rates and potential GDP, so it's all in the mix.

Our biggest activity at the bank here with regard to climate change, is our financial stability work. Around making sure that the financial systems are both prepared and resilient, but also doing their part in pricing and identifying risks, and working with their communities the way through. That is real, that's life, and this is a real example. Another angle which I will state so it's well noted, is resilience in our banking system. Our drive to cashless society shows how vulnerable we are. This is why we have been doing the work on cash, and cash distribution throughout the economy. So de-risking, de-branching, pricing, cash management, out of use, increases risk, reduces resilience.

Lucy:

Lucy from Reuters. Just wanted to go back to your comments about inflation. Has inflation, do you not think inflation is peaked now? Are we going to see it go above 7.2% because of the current disasters, or are we just going to sit around this level until that inflation pressure comes off?

Governor Adrian Orr:

For the current quarter, we're in the March quarter, we are saying 7.3% is our estimate for this quarter. In that estimate, it is elevated from where it would've been in the absence of the severe weather events. So we've put some additional price pressure. But beyond that, we see an easing path continue through. The price pressures are short term and immediate, we hope. Because if they're not, it means there's more work for monetary policy ongoing.

Luke Malpass:

Governor, Luke Malpass from Stuff. Just to go back to a previous answer you gave and to be a bit explicit, you were saying before about the ways in which government might finance the rebuild. Are you saying that either re-prioritisation what's in the government, the current budget, or some sort of tax increase or levy would make your job easier, as opposed to increasing deficit spending?

Governor Adrian Orr:

I'm saying they are all valid and important decisions the government should make. And if they chose the re-prioritisation and tax increasing, then that does mean less increase in aggregate demand, less monetary policy pressure. Yes.

Luke Malpass:

And just on a separate matter, over the past few years you've got a bit of stick from some quarters from the bank's focus on climate change. And in the aftermath of these particular disasters, of course there's been a lot of talk about adaptation and New Zealand having to be resilient. Do you think that there's a, I guess a bit of a vindication to the work that the banker has been doing that's been forward-looking?

Governor Adrian Orr:

Yeah. I won't say vindication, I would just say a reminder and sense of urgency that this is really important. It is real, it is happening. We need to both mitigate and adapt to the climate change that's going on. This work is critical for our monetary policy, our financial stability, and even through our cash management operations as you've seen. It is a-

PART 3 OF 4 ENDS [00:30:04]

Governor Adrian Orr:

Our cash management operations as you've seen, so it is a critical component. As is financial inclusion. You're seeing and reading some horrific stories out there at the moment of isolated communities. When people lose the ability to transact, when they don't have a means of exchange, then social cohesion is very quickly challenged. And so these are vivid reminders right now of the importance of resilience through the system. And we could go on for days across almost every sector of the international economy at the moment where just-in-time management has been taken to extreme, and just-in-case management has been left in the background. So a good horrible wake up call.

Speaker 9:

Governor, just back to the comments you made about availability of labour, and I know you've been beating the drum for some time. How many workers short is New Zealand? If you had a magic wand, you could insert a number into the economy. Can you help quantify that actual lack of availability.

Governor Adrian Orr:

I don't think we can wave a magic wand like that, because there are many different variables that I don't want to hide and horribly sound like an economist. But what we do know is that every single indicator we have of maximum sustainable employment are at an extreme high, and that labour shortages are the most. So I would be suggesting... Well no, I don't even want to say a number.

Paul Conway:

Well, neither do. It's hinting at the immigration debate. Would an inflow of migrants make all our problems go away of a capacity-constrained economy? And yes, that would help on the supply side, but migrants tend to bring demand with them as well. So I don't see that as any kind of silver bullet. I do think severe labour pressures at the moment. It's a good time for businesses to be thinking about investing in capital and investing in technology, and to substitute away from a typically labour-intensive method of production to a more capital driven, technology driven.

Governor Adrian Orr:

So we have unemployment projected to rise from 3.4% to around just over 5.5% over the course of the cycle. And that would bring it somewhere slightly north of a long run average type of unemployment level. So you can back out numbers from that if you want to, but...

Speaker 6:

Lucy, from Reuters, after the Christchurch earthquake, we saw the reinsurance flows coming into the country, it pushed up the New Zealand dollar, and it boosted GDP. What sort of impact is reinsurance? Have you got any kind of idea on how big those flows are going to be? Is it going to be less than Christchurch, because it's looking at roading and housing, as opposed to apartment buildings? Do we have any idea if we're going to see the same kind of impact?

Governor Adrian Orr:

Yeah, again, the data and information is coming in. I can say less than Christchurch, considerably less Christian than Christchurch, to get an idea. And for the reasons you've talked about, uninsured, underinsured, public sector insurance, and then the actual insurance being around housing and household items. So it's not of the scale of Christchurch. We were working with the insurance industry. One real critical lesson we've learned through our stress testing is that we are very good at managing one flood. If another one comes very quickly afterwards, we're less good, and pricing starts to move on us. The more frequent they happen, the quicker the reinsurance pricing starts to get priced away from us, because the rest of the world starts to ask questions about how secure our New Zealand is.

Speaker 1:

I'm just wondering if you feel that even if central banks globally do get on top of this recent spike in inflation, that we may have gone through some sort of a paradigm shift where we're entering an era of more ingrained, or faster inflation than what we've seen over the past decade or two. Do you feel that there's been some sort of a change towards a more inflationary environment looking ahead?

Governor Adrian Orr:

No. I've seen no research or useful evidence that suggests that inflation targets should be shifted to a higher. Inflation's no one's friend. And what you're talking about mostly it generally ends up being a relative price shock, not generalised inflation where I see a price of an ice cream go up so I charge more for a haircut, and so on so forth. I don't know what evidence I'd have to suggest that is more ingrained. The real challenge of when it becomes ingrained is when that behaviour starts. That's called inflation expectations and that's the warning Paul said, do not use near term price spikes as an excuse for starting putting up the price of everything everywhere. That would be called profiteering.

Speaker 1:

I was just thinking more in terms of resilience. You spoke about resilience, or the lack of resilience being exposed by these events.

Governor Adrian Orr:

Again, that's not a rate of change in prices. That's about fixed investment, depth of capital, stocking, all of those areas. So you might see one-off price changes, but it doesn't mean ongoing inflation.

Speaker 1:

Thanks.

Governor Adrian Orr:

Cool. Just one more is it?

Speaker 10:

Yep.

Governor Adrian Orr:

And then I'll get Oliver's army onto it.

Bernard Hickey:

Governor, you mentioned the problems with banks pulling out of regional areas, and no ATM machines, and people who don't have bank accounts. Whose responsibility is it to ensure that the social stability around the banking system remains strong? Because I can see how the Reserve Bank is responsible for the financial stability of institutions overall, which you could argue being more profitable helps, and therefore removing some of these small expensive branches, it's actually a good thing from a financial stability point of view. But whose job is it to make sure that these banks stay there and that there is cash in the machines and all that?

Governor Adrian Orr:

It's a great question. Thank you Bernard. I will say that part of that sits here, with us, at the Reserve Bank. In our financial policy remit we have financial inclusion as one of the issues we have to have regard to. And we are talking exactly about issues of financial inclusion. We also have a formal stewardship role, which is new to the bank, around cash and cash distribution. And so again, that is the work we have to do with the banks and with the cash-in-transit firms around ensuring that just-in-time doesn't get in the way of just-in-case. And so these are the important work we're doing.

And the bank has been publishing on this work for the last two years or so around our future of money work. An important part of that is whilst people say, "I don't use cash daily or regularly," some people only use it and all of us use it sometimes. And this is one of those times when all those people in that region needed to use it. So financial inclusion sits with us, it sits with the Financial Markets Authority, but it sits with the banks as well, around their social licence and their customer care. And so this is work we are doing with them.

Bernard Hickey:

So would the Reserve Bank look in particular at things like ATM machines, and if POS machines being completely reliant on mains power, and the increasing reliance of our retail system on EFTPOS, so when we lose power, we also lose the ability to transact.

Governor Adrian Orr:

That's correct. And that's exactly what we've seen the last week or so, whilst outside the Monetary Policy Committee has been primarily involved in making sure we have cash circulating in areas that do not have electricity or communication. There's nothing more distressing than seeing a cafe serving hot coffee beside a bank whose ATM doesn't work, one had a generator. And so it's these lessons around resilience. Operational risk is as important as financial risk, reputational risk. And these are the conversations that I believe have been too lacking. And we have been working for a couple years around models. The New Zealand Bankers' Association have been testing banking hubs and different ways of doing it, but we are far from being there yet. Cool. Thank you very much. And again, our hearts go out to all of those affected.

PART 4 OF 4 ENDS [00:39:02]

 

Monetary policy snapshots

The Monetary Policy Committee today increased the Official Cash Rate (OCR) from 4.25% to 4.75%.

The Committee agreed that the OCR still needs to increase, as indicated in the November Statement, to ensure inflation returns to within its target range over the medium term. While there are early signs of price pressure easing, core consumer price inflation remains too high, employment is still beyond its maximum sustainable level, and near-term inflation expectations remain elevated.


Demand in the New Zealand economy has been robust, but there are early signs of slowing.

  • Demand in the New Zealand economy was robust in 2022. Economic growth has been supported by household spending and construction activity, strong government spending and a swift recovery in international tourism since the the border reopened.
  • Household spending has been resilient to date. However, there are signs that it may be slowing, reflecting lower house prices, high inflation and rising interest rates. Worker shortages continue to limit economic activity, but labour market pressures have eased slightly.
  • Businesses’ perceptions of economic conditions have worsened as the outlook for consumer spending, exports, and building activity has weakened.

The tourism recovery has supported the services industry, but global growth is easing.

  • The number of international visitors has increased rapidly since the border reopened. This has supported the recovery in the tourism sector and activity in associated services industries, in particular transportation, accommodation and restaurants. Pent up demand for travel and reduced capacity have contributed to higher airfares, accommodation and other tourism-sensitive prices.
  • Slowing global demand has led to a decline in international prices for some of our key commodity goods exports like dairy, meat and logs. It is likely that demand for our exports will increase following the recent easing of COVID-19 restrictions in China.

The severe storms across the North Island are expected to increase inflation and disrupt production in the near term, and add to activity during the rebuild.

  • The severe storms in the North Island have had a devastating impact on the lives of many New Zealanders and our thoughts are with those affected.
  • These storms have led to destruction and disruption across a variety of industries and infrastructure. This will lead to shortages in some goods and services in the near term, and upward price pressures are likely to stay high as a result. Rebuild work will increase activity over coming years.
  • Significant economic losses have resulted from these storms. The best contribution monetary policy can make right now is to free up resources elsewhere in the economy by slowing demand through higher interest rates. This will also limit further increases in the cost of living over the medium term.

Higher interest rates are needed to sustainably reduce inflation and support maximum sustainable employment.

  • Inflation remains widespread and too high, at an annual rate of 7.2%. Measures of core inflation, which strip out prices that are volatile like fuel and food, have also remained elevated.
  • High ‘core’ inflation, inflation expectations, and temporary price pressures associated with the recent storms suggest that headline inflation will stay high in the near term, and is likely to begin to decline significantly only from the second half of 2023.
  • The labour market remains extremely tight, with employment above its maximum sustainable level. The unemployment rate was 3.4% in the December 2022 quarter. Worker shortages led to an acceleration in wage growth, supporting household incomes but adding upwards pressure to domestic inflation through increased business costs.
  • Overall, the New Zealand economy has evolved largely as expected at the time of the November Statement. Although CPI inflation was slightly lower than expected in the December 2022 quarter, the starting point for economic activity was stronger. Higher interest rates are needed to ensure that inflationary pressures ease and employment returns to its maximum sustainable level.