Monetary Policy Statement and OCR

Adrian Orr: Well, greetings everyone. Kia orana tatou katoa katoa. Tēnā koutou katoa . Welcome to the Reserve Bank of New Zealand, Te Pūtea Matua. And with me on stage today is Karen Silk and Paul Conway, two members of the Monetary Policy Committee, and we have other members in the room with us and online. I do want to just thank you all for a wonderful eight, 10 days of brewing up our story that we have today and our decision that is made. So even a no change still takes a lot of work to produce the documents we have.

As you're all well aware, the committee today agreed to maintain the official cash rate at 5.50%. We believe that the current level of interest rates is constraining spending, and hence inflation pressure. And this is as anticipated and required. We also agreed that the OCR needs to stay at a restrictive level for the foreseeable future and this is to ensure that annual consumer price inflation returns to the one to 3% target range, while supporting maximum sustainable employment.

The economy as a whole in New Zealand is evolving broadly as anticipated. With this, activity continues to slow, in particular in those parts of the economy most sensitive to interest rates. Labour shortages are also easing related in part to slowing overall demand, but also higher net immigration adding to the labour resources in the economy. Meanwhile, it's pleasing that headline inflation and inflation expectations have declined, but similar to the global story, core inflation remains too high.

Turning to the international outlook, economic growth internationally remains below trend, and headline inflation has also eased for our trading partners, but again, core inflation remains high in many countries. The weakening global economic growth is putting downward pressure on New Zealand's commodity prices and export revenues.

The imbalance that has developed in the economy between demand and supply is now moderating in the New Zealand economy. However, we still see a prolonged period of subdued spending growth being required to much better match the supply capacity of the New Zealand economy and to achieve our inflation remit.

In terms of risks. In the near term, there's a risk that activity and inflation measures do not slow as much as expected in our near term, in our forecasts. And likewise, over the medium term, there is the risk of a greater slowdown in global economic demand, particularly in China, weighing more heavily on commodity prices and New Zealand's export revenues.On balance, the committee is confident that with interest rates remaining at a restrictive level for some time, consumer price inflation will return to within its target range while supporting maximum sustainable employment. Meitaki ma'ata, we are open for questions. Thank you.

Media questions

Media: Hi, Tracy Withers from Bloomberg. You've raised the average OCR projection track a little bit to a high of 5.59% next year, previously 5.5. How should we be interpreting that?

Adrian Orr: I think certainly not as forward guidance, more as just our prediction, our endogenous model. We let it work, we let it tell its story. And most of the shift in the OCR track between the May monetary policy statement and this August one has been largely related to things we've already seen. Slightly earlier than anticipated stabilising in house prices, slightly higher CPI. Slightly... So just on balance lots of little things. So it's more of a starting point issue than any strong signal about our likely next move.

Media: But would it not signal a risk that there will be another rate increase between now and the end of next year?

Adrian Orr: No, I'd say on balance we are in a watch, worry, and wait mode and we do need to see inflation continuing to decline. Likewise, we need to be wary of doing too much.

Media: Just finally on that, now the track also doesn't see a significant decline until maybe early 2025 on my look at it. I mean, markets are expecting a rate cut in the second half of next year. Are the markets getting it wrong?

Adrian Orr: I think judging a very quick glance at pricing, our forward track is very consistent with market pricing at the moment. And then I'll put that usual health warning on, our forward track will change through time. That's just the nature of economic projections.

Media: Tom Pullar-Strecker from Stuff. You appear to have given quite a strong nod to concerns about inflation here, perhaps a lesser one to a drop in economic activity being sharper than you expect. Noted that you're saying, the bank's saying the current projections are for subdue GDP growth rather than a sharp downturn. I mean, if you have got that long, I'm not saying that I think you have, but if you have, what will be the first signs that you may have underestimated that downturn?

Adrian Orr: So the committee debated this a lot. Even a hold is a tough decision, and really the way we've tried to explain it through the document is that the risks in the near term over the coming next few months are that activity and inflation may print higher than what we've put down there. That's a risk. We've got a reasonable track embedded in our projections, but there are lots of the usual one-off explanations as to why things may take longer than normal. So that's the near term risk.

What are we doing about that? Well, we are making sure that we aren't going to be surprised by it when we see it, we're saying, "Hey folks, the medium term is what really matters for us." In the near term we may still be struggling around headlines, CPI being held up through administrative prices, or GDP growth being some shade of zero, but slightly positive rather than zero, that type of noise.

So we are really steadying ourselves to be able to work through that, to not be surprised or [inaudible] by it. Our larger concerns are the medium term and that's where global growth is slowing. We all know that China economic activity is struggling and so it's about bridging the near term through to the more medium term where inflation is back in the box and interest rates are renormalization.</p

 

Media: Just a quick follow up on that, I think the insiders described the leading indicators that we've seen over the past few weeks as very ugly. It doesn't sound as though you're quite interpreting things in the same way. Is that correct?

Adrian Orr: I don't know which way they think of ugly, sorry. I would say that the data recently has been coming out as anticipated, i.e., economic growth is slowing, inflation pressures are coming off, labour market constraints are easing up. So a lot of these data observation we're seeing are really indicators of what we expected to see, a much slower economy both domestically and global and inflation pressures coming out. So it could be ugly in a good sense that monetary policy is working.

Media: Janaeta Trini from The Herald. Are you comfortable with the extent to which banks have lifted their mortgage rates in recent weeks and months in relation to wholesale rates, and what impact do you expect this statement will have on mortgage rates in the near future?

Adrian Orr: So we can only control the official cash rate and then it's a competitive market out there. Banks have been responding to really the cost of funding, which is longer term wholesale interest rates and also attracting deposits. So their cost of funding has been rising and they are busy passing that on to those who are borrowing. I will note that those aren't many. Credit growth has been very slow, again consistent with tight conditions. So it's a normal market behaviour. Our expectation over the period ahead is that bank margins will come under narrowing pressure given that higher cost of funding, more competition going on as the market gets thin for loans. So you see the cyclical behaviour in the margins.

Media: All right, just onto something that's not covered in the statement, but the ECB recently decided to change the way that it remunerates banks for their settlement deposits in a way that might save taxpayers money effectively. Why is the Reserve Bank not keen to take a similar tiered approach in a way that that might save taxpayers money?

Adrian Orr: I don't want to go, so we don't actually believe it would be effective in our monetary policy space and we've made that, we've got publications on our website exactly our thinking on that. I can't talk on behalf of the ECB, but it did not look like an effective policy for the Reserve Bank. If we wanted tax banks, then tax banks, that's not Reserve Bank's policy.

Media: Lucy from Reuters. Overnight, we saw dairy prices fall, they're now at the lowest level in five years. How much of a concern is falling commodity prices for your outlook for the economy?

Adrian Orr: We have a pretty subdued path for international commodity prices in our projections ahead for exactly the reasons that we're seeing slower overall demand internationally leading to weaker prices. And so that's playing out. So again, in a sense it's not a surprise, it's more just an outcome that we would anticipate to see that happen. But we do spend quite a bit of time acknowledging that the impact of a global slowdown, and rising interest rates will not be even across all sectors of the economy. Some sectors are going to be doing it harder than others. The agricultural commodity sector will be one. Commercial property activity, another sector doing it tough. Construction coming to an end of a record building boom. So it's never going to be even.

Media: Hi, Governor. Afternoon, Dan Brunskill from Interest last time around there was some disagreement among the Monetary Policy Committee about whether to stay at 0.25 or go to 0.5. This time there was a consensus to hold. Was there any consideration of a cut, or have those members who previously thought rates needed to be lower, have they been convinced that actually the bias is higher now?

Adrian Orr: We talk all the time around all options. So a cut, a hold, a rise. A hold was without doubt the consensus of where we were. No, there wasn't much discussion about whether we needed to go back to 5.25. It's done. It's happening. And so it was an easily formed consensus.

Media: And if you'll forgive me for asking a slightly sensitive question, do you intend to serve out the remainder of your term if the government changes, and if the new government asks for your resignation, would you offer it?

Adrian Orr: Oh no, I don't have any comment on that. I'm employed for another five year term, so.

Paul Conway: Can I just go back to your earlier question just to make the point that there was consensus last time around on the peak in the OCR being at 5.5%. The vote was for the move at that meeting. So where we are now is consistent with that.

Media: Hi, Jenny Ruth from Good Returns and Just The Business. Just following on Dan's question, do you expect there to be any challenge to the Reserve Bank's independence should we see a change in government?

Adrian Orr: Our legislation is written in law. Future governments can change the law. That's all I can say. We believe we're in a very strong position as a central bank doing its job for RTRO New Zealand.

Media: Janaeta Trini from The Herald again. We're in a pre-election campaign mode and most parties are campaigning on some form of tax cuts or tax relief. How concerning is that, or not, for you?

Adrian Orr: So we always have to play the hand that is dealt to us when it comes to fiscal policy. Governments are the elected officials. They can choose to do what they wish to do with fiscal policy, and we just have to, when it becomes official, then we have to put it into the mix of issues we consider. So it's business as usual really.

Media: Do you have any thoughts you'd like to share with political parties about what the economy may or may not need at the moment?

Adrian Orr: No, I think it's very clear from our document that monetary policy is doing its job with all else taken as given. And we are very careful to always highlight that we're using official budget figures, not our own guesstimates of what might happen.

Media: I'm Harry Bartle from News Up Here, apologies if this was covered, but is there a risk of another rate hike?

Adrian Orr: There will always be a risk of another rate hike. There is also a risk of a rate cut. This is the world we're living in, so you could never say never, but at the moment we are very comfortable that with conditions where they are, we will achieve our task. I'm not giving you guys much fun, am I?

Karen Silk: No.

Paul Conway: No. Yeah.

Adrian Orr: Next one's coming to Karen. All right? [inaudible].

Karen Silk: Yeah.

Media: I have another question. You publish, forgive me if I get the name wrong, but a sectoral factors model of core inflation. I don't really know what goes into it, but it has not moved very much. Doesn't that concern you that it's stuck it been stuck there for...?

Adrian Orr: It sounds like a Paul Conway question there.

Paul Conway: Yeah, let me have a go. We use a range of indicators to measure what we call core inflation. So the persistent bit in inflation, that's one of them. There is quite a divergence across those models in terms of where core inflation's at, but most of them in general are saying that it's obviously far higher than we would like. Some of them are showing positive signs of turning down.

We don't put a huge weight on any one in particular. We more take the suite of measures as giving us a distribution of what's likely to happen to core inflation. I'm sure if you want some technical details on what's in that model exactly, you could find something on our website. We'll talk to Rebecca in the front row there.

 

Media: The other economics question is you have increased your neutral OCR estimate. Can you talk a little bit about what's gone into that, and if that's contributing to the upward bias in the track if you like, rather than what you're seeing in economic data?

Paul Conway: So again, we use a suite of models to estimate what the neutral OCR is at, and currently, long run, interest rates have been a bit elevated for a while. So that's feeding through into those models. Routinely, we will update our estimate of what's happening with the neutral OCR. This time around we've nudged it up by 0.25%. Important to note that that's very much, in the long run, it would at the margin suggest upward pressure on the official cash rate, but that's over the course of the projection horizon and the committee is confident that the current setting for the OCR is at a restrictive level.

Media: Oh. Lucy from Reuters. Is the weakness of the Kiwi a new worry for inflation? And why do you think it's so weak, given that New Zealand rates are internationally high at 5.5%?

Adrian Orr: On the exchange rate, again, we don't target it. It's a freely floating exchange rate. We make an assumption when we do our projections. And then as actual exchange rate unfolds significantly different one way or other to our assumptions, we respond at that point. The exchange rate can be a complicated thing to think about with monetary policy. There's a very narrow, simple thing that if the exchange rate depreciates import costs go up, New Zealand dollar terms, but that's too simplistic. Sometimes the exchange rate may fall for good reason without having that type of inflation pressure. So hence what I'm saying is we just have to sit and look at the whole context every time with our projections, rather than, I suppose keying off any one foreign exchange rate level.

Karen Silk: Just on the interest rate differential. So it's not just about where the absolute interest rate is here, it's about our differential between interest rates here and those of our trading partners in particular. If you're looking at the trade weighted index. And what we've seen is that differential narrow, because we've been holding interest rates, and our trading partners have been largely increasing interest rates.

Media: And secondly, the RBNZ website went down at two o'clock today. Is there anything nefarious about the fact that it went down?

Adrian Orr: So the good news is we got all the information out we needed simultaneous to the markets. So I'm pleased with that. I'm less pleased with the fact that, you're right, it was slow in loading the document. And so our folk are looking at it and at the moment, but no, nothing I can, what was the word you used?

Media: Nefarious.

Karen Silk: Nefarious.

Adrian Orr: Nefarious. Very good word. So nothing nefarious to the best of my knowledge.

Speaker 11:

Media: May as well.

Adrian Orr: Too wet outside?

Media: It's nice and warm. This might be a silly question, but is there a point at which tight monetary policy becomes less effective in the sense that people who were going to cut their spending because of high rates have already cut it, and people who were going to save more because of attractive term deposit rates are already doing that. And obviously these things target different cohorts of society. Is there a point at which hiking rates more doesn't actually achieve as much as when rates were low and they were hiked?

Adrian Orr: I'm pretty sure it would be reasonably linear across that full scope of interest rate behaviours. You remember that whilst there's the stock, there's also a continuous flow with your marginal dollar that you've earned. Are you going to save? Are you going to spend? And for businesses, are you going to invest, et cetera? So it remains doing its role across different levels. You haven't found any nonlinearities in that relationship?

Paul Conway: Well, I mean there are nonlinearities in the economy, but I think it's also important to, there's other transmission channels than just that credit channel that you're talking about. So I'm not aware of any literature showing that monetary policy runs out of puff in terms of being contractionary. I think those issues are more on the downside when we hit the effective lower bound and that sort of stuff. But I'm not aware of any literature suggesting that it's symmetric with interest rates going up. Interesting question though, Janae.

Media: Early on in the hiking cycle we talked a lot about trying to engineer a soft landing. We've stopped using that term, and I know it's a hard to define term, but do you think we're still on the "soft landing" path? Is this...

Adrian Orr: Yes. Yes we do. If we can have basically a stable level of economic output, employment remaining at these very, very high levels and disinflation happening, that is a soft landing. So our projections are for something which is effectively flat growth for the period ahead, and then renormalizing. So that is a soft landing.

Paul Conway: With inflation coming down.

Media: Then on a slightly more personal level, do you all feel less stressed looking at the numbers now? Are you feeling better? Does it look good?

Adrian Orr: There is a degree of confidence around the committee, which is why we are able to pause, and observe, and look at the data, and why we can talk so openly about some of our expectations over the next few months so that you know what is or isn't a surprise to us as we keep going. I'll just make a comment there. There's a lot of discussion today around 5.5 is 5.6, et cetera. 10 basis points is absolutely lost in the wash of the uncertainties you deal with, with these monetary policy projections.

If we put a straight line, we'd be accused of providing direct forward guidance. If we have a squiggly line that's letting the models work. It's a squiggly line. So we are where we are, and we'll be watching the information as outlined. And we're in a good position to go left or right depending on which way we need to do it as the data unfolds. Cool. All right, well thank you everyone. Thank you very much for being here. Stay safe and reasonably warm outside. All the very best.