February Monetary Policy Statement and Official Cash Rate (OCR)

Adrian Orr:
Well, Kia orana tatou katoa katoa. Tēnā koutou katoa, and welcome everyone to Te Pûtea Matua, the Reserve Bank of New Zealand. And we're here obviously to talk about our monetary policy statement, the first one for 2024.

I'm joined by our assistant governor, Karen Silk, and our Chief economist, Paul Conway, and I'm also here with members of the Monetary Policy Committee. So thank you for all of your support, and in particular to the staff for an excellent document.

As you are aware, we agreed today to hold the official cash rate at 5.50%, so the official cash rate is on hold. And we are pleased to say that over the past year or so, the New Zealand economy has evolved broadly as the committee has anticipated. Core inflation and most measures of inflation expectations have declined, and the risks to the inflation outlook are now more balanced.

However, with headline inflation still above our one to 3% target band, the committee reiterates our ability to tolerate upside inflation surprises remains limited.
Restrictive monetary policy and lower global growth have contributed to this aggregate demand slowing, and I'm pleased that demand now better matches the supply capacity of the New Zealand economy.

With immigration, the high level of immigration we've had recently and with the weaker demand, it's meant that capacity constraints in the New Zealand's labour market have also eased. However, the recent high population growth is supporting aggregate demand in total, and we think one very evident example of this is the rise in dwelling rents, more people to house.
Internationally, global economic growth remains below trend, and is expected to slow further through 2024. This subdued environment globally will support further moderation in New Zealand import price inflation. We note that the outlook for the China economy remains particularly weak, especially relative to historic norms, and that they have challenging structural factors constraining their long-term growth.

A more general risk to global economic activity and growth is that central banks may need to hold their policy interest rates at restrictive levels longer than what have been priced at markets over recent periods, to ensure that inflation targets are met.

Heightened geopolitical and climate change conditions remain risks for the inflation outlook. These aren't theoretical constructs, they're real and impacting on our decisions in real-time. The recent rise in global shipping costs are one manifestation of these risks.

The committee remains alert, of course, to these relative price risks. Or in this case, relative cost risks, and we stand ready to act if necessary, if there's signs of any spillover into more general inflation.

The committee remains confident that the current level of the official cash rate is restricting demand. However, a sustained decline in capacity pressures in the New Zealand economy remains necessary to ensure that headline inflation returns to the midpoint of our one to 3% target range. Hence, the OCR needs to remain at the restricted level for a sustained period of time.

Thank you very much for your attention, and we are open for questions.

Matthew Brockett:
Thank you. Matthew Brockett from Bloomberg. You just said that central banks may need to hold rates higher than markets currently expect. Could you expand on that? Are you saying that the debate around rate cuts globally has been premature?

Adrian Orr:
Really, what we're saying is that markets have been very volatile, trying to pick what would be the peak of official policy rates. And of course if they feel we're at a peak, when is the next move downward? And so you are seeing a lot of volatility in global interest rate markets.
You've seen it here in New Zealand, fed through from expectations. The US Federal Reserve may start cutting rates, and then hence what that means for New Zealand. And what we're saying is, central banks have a job to do. They're focused on that job, and the policy rates won't be moving until the high level of confidence on inflation.
And that really was a starting, an important starting environment for our work as well. As soon as people think that you might've done enough, the next guessing game is, well, when are you going to start cutting?

Lucy:
Lucy from Reuters. Did you guys discuss a hike at the committee meeting, and how close was the decision on whether you hiked or held?

Adrian Orr:
Yeah, wonderful question. And yes, we did. We certainly didn't discuss a cut. But on the table was a hold, or do we need to do more? It was a very strong consensus that the official cash rate is doing sufficient, and that the economy has been evolving as anticipated. So that's where we got to a comfortable consensus, that on hold for now.

Jenny Ruth:
Jenny Ruth from Good Returns and Just the Business. Retail volumes have been falling for eight consecutive quarters despite the really strong inward immigration. How are you reading that?

Adrian Orr:
Yeah, wonderful. I'll pass over to our chief economist, Paul Conway. Paul?

Paul Conway:
Yeah, thanks Jenny. We're seeing that as consistent with a slowdown in the economy, which is exactly as anticipated by the Monetary Policy Committee for at least the past year, and as required to get inflation back into the target ban. So very, very much consistent with what we've been looking for.

Giles Beckford:
Giles Beckford, Radio New Zealand. Was there any particular development over the past three months that has perhaps made you less anxious? Because you were certainly somewhat aggressive, talking of rate rises or possibilities of them in November. What's occurred particularly that now makes you more balanced?

Adrian Orr:
Yeah, wonderful question. Thank you, Giles. And the answer is a combination of issues, no one single variable. It's been very pleasing to see actual inflation, headline inflation, and measures of underlying inflation all decline. And it's been comforting to see inflation expectations decline. In fact, we've seen some quite significant movements in the business-led inflation expectations.

Meanwhile, we feel like we're getting a better handle. It's been literally a learning period around net inward migration, given the way the stats are rolled out. And we were able to dissect, I would say, the GDP revisions that were significant back through time. And see that on net balance, there was more excess capacity in the economy.
So it's been the aggregate of many variables that have helped us gain the confidence that the current restrictive level of conditions are doing what we would anticipate them to do.

Sam Ollie:
Sam Ollie, from One News. There are homeowners paying over 7% in desperate situations, what do you say to those people right now?

Adrian Orr:
We feel for homeowners and people who are financially stressed at the moment. And our constant call for a long period of time is to stay close with your bank, your mortgage lender, and they will work through this with you.
In aggregate, our financial system is very strong. Financial institutions are strong, and they have been to-date, very proactive with their customers on the way through. But if the cost of living challenge has become a choice of living challenge, the people are going to have to make significant budget choices in the period ahead with their banks.

Jenny Ruth:
Hi, Jenny Ruth again. Are you still really concerned about underlying inflation? Sorry, not underlying. Non-tradables inflation?

Adrian Orr:
Yes, yes we are. I mean, it's a global phenomenon that the tradables prices tend to move up and down a lot quicker than homegrown inflation pressures. They move up and down because that's the global trading environment, primarily goods. The homegrown inflation pressures are now easing, and easing as we had anticipated and hoped. It's much nicer to be able to actually see that happening, rather than project it happening. So core inflation pressures are coming out of the system at about the pace we would've anticipated.

Jenny Ruth:
I'm thinking particularly of things like rates, council rates. Monetary policy doesn't seem to do very much to quell those sorts of increases.

Adrian Orr:
Yes, I like the challenge you're putting there. The Consumer Price Index is made up of many, many components. And once you start climbing down into the components, monetary policy really doesn't impact, directly, any of them. It impacts indirectly the components of the CPI, via spending demand and supply. That's how it impacts on it.
So you are right, we do not set local authority rates, we do not set prices. We set the price of money, which then determines over time willingness for people to hold it or not, spend or save. So it's that second round indirect impact.

As we get to the lower inflation parts, there are some really persistent and challenging parts of that inflation picture, and it just means that we may have to work harder to achieve the same outcome. But I would say it's no different to any other period.

I will put a little plug out there. The hardest component for us to manage is productivity. Low productivity means low nominal GDP growth before you get inflation pressures rising. So if we had a higher productivity economy, we would be able to deal with these relative prices much easier. But again, that's in the hands of business people, consumers, investors, government policy. We just control the price of money.

Lucy:
Lucy from Reuters again. You've talked about population growth supporting aggregate demand. How concerned are you about population growth going forward, and its impact on inflation?

Adrian Orr:
So I remove the word concern. We have no influence over it, we just to play the cards that are handed there. So the fact there's been more people over recent times, it's had some really interesting and important influences on our outlook.
One important influence is that we have managed to achieve declines in inflation without the projected rise in unemployment to date. That is because labour suppliers come on tap, and largely tempered wage growth. And so we've been able to have a lower cost to the disinflation to date, a softer landing. I don't want to provide a commentator's curse to that side.
But then looking forward, we always have to look at aggregate demand, it's going to be a function of how many people. And aggregate supply, what is the productive capacity of the economy? So migration will play on both sides.
To date, has played a really important role on the supply side, productive capacity of New Zealand to produce. But we are seeing those demand pressures there in, for example, dwelling renters.

Luc Mehl:
Thanks. Luc Mehl, The Post. Governor, I was wondering if you would be able to expand a bit on what the bank thinks that you're seeing out of China, and the effects that they may be having on the New Zealand economy.

Adrian Orr:
Yeah, so the long, historical one in three seconds flat is, we've had a fantastic positive China dividend to inflation pressures for several decades. China coming on stream, China producing goods and services, relative prices declining, has been an inflation dividend. That has largely run its course. People are catching up. In fact, surplus goods and services are starting to struggle.

China is now at an inflexion point in its middle income. We're just producing the same thing cheaper, or just using more and more inputs to produce things, are no longer going to make their economic way forward. They have to be operating smarter. So you're seeing their potential growth rate declining.

That means there will be slower global economic growth. At the same time, if their demand is falling away, it will mean that there is still some downward pressure on aggregate inflation through demand for our goods and services, rather than cheaper imports. Sorry, I'm making it sound complicated.

The significant challenge for the policy-makers is an ageing population, limited social security for that population, and limited policy levers such as sophisticated fiscal policy tax regimes, so they really are playing direct-to-market on the aggregate demand side. All of this stuff only heightens geopolitical risks. If you get to the point where you are trying to mass-produce goods to keep yourself alive, and others are trying to put up trade barriers, that's tension.

Jenée Tibshraeny:
Jenée Tibshraeny from the Herald. Would the Reserve bank be comfortable if mortgage rates started coming off a wee bit, because the market expected a more hawkish statement, perhaps, than was delivered?

Adrian Orr:
Yes, it's a competitive environment. So we're doing our bit, we're making it very clear what we're trying to achieve. Banks will compete with each other on their pricing. I know a couple of banks moved to lower interest rates ahead of this announcement, that's the nature of the game.
I really do hope it's competitive out there, because I imagine it's in a low-volume market as well. So we should be seeing pricing pressures, we should be seeing margins tightening up. We should see the banks working hard to win against one another.

Jenée Tibshraeny:
Yeah. And, oh, sorry. Did you want to add anything?

Karen Silk:
No, no, I was just going to say that with the change in funding mix that we're also expecting to happen with banks, with lower cost funding rolling off and moving more into wholesale and competing more strongly for term deposits, there's only going to be so far that the banks can come at that point in time, because they're going to face into a slightly higher cost structure in terms of their funding. So we are thinking not just about the most immediate reaction now, but what we see over that forecast period.

Jenée Tibshraeny:
Actually, and just further to that, I don't know if you know off the top of your head, but how much of the funding for lending loans have been repaid?

Karen Silk:
I haven't got the number off the top of my head, but it has started to occur.

Jenée Tibshraeny:
Okay. And then just also on, this might be a silly question, but is there a point at which OCR hikes become less effective? And I ask this because, as has been previously discussed, some of the drivers behind inflation are things like rates and insurance, which are affected by other factors that you can't control.
And also, rents might be going up because people with mortgages under pressure, same with businesses. Base high interest costs, so on and so on.

Adrian Orr:
So I think the answer is no, the official cash rate is as effective as ever. We're detecting no difference in the timeliness or the effectiveness of official cash rate changes through time.
But then to take the next step, what you're discussing there are relative prices. There are going to be upward pricing pressures in some important sectors of the economy for important. What we're trying to make sure is not everyone else hides behind those price rises and creates generalised inflation. That's the role of monetary policy.

Matthew Brockett:
Thank you. You were one of the first central banks to start raising interest rates in the wake of the pandemic, but New Zealand inflation seems to be slowing a little slow. It hasn't fallen as quickly, or as rapidly as it has in other countries. I'm wondering if there are any sort of features of the New Zealand economy that make monetary policy have less traction, or less effective than in other places?

Adrian Orr:
Yeah, I mean, great question. First of all, I'll just put a hazard check out there on fact, our inflation data is very lagged and quarterly. And we do a call-out and owe to Stats New Zealand that the more they can get to monthly whole consumer price indices, and the more regular they can be reweighed, rebased, then at least we know we've got apples with apples across countries. So that is an important caveat.

The second bit is, countries who had significant high population growth have had more persistent domestic inflation pressure, and have had to do more work. The Australias, the Canadians, rather than the OECD broad in general. So that's another point.

And lastly, New Zealand was very successful at saving lives and livelihoods through the Covid period. So we have had a very robust dynamic domestic economy, and that has created that real head of steam that we've been leaning against over time.

Lucy:
Lucy from Reuters. Market has just [inaudible 00:19:50] out any chance of another rate hike. Is this reasonable? Have they gone too far?

Adrian Orr:
From what we're saying, we've put our best foot forward today. And so markets will pick 15 of our next two changes, that's really where we're at. It truly is.
As I said, our outlook for inflation, we believe, is balanced. Our risk appetite is asymmetric. We just, given we've got that 4.7% inflation and we want too, we can't suffer upward surprises. So it's kind of a nuance to try and get across; a balanced outlook, but an asymmetric reaction function still sits here with the bank.

Dan Brunskill:
Governor, Dan Brunskill from Interest. That's what I want to ask you about. Because back in November you said we've got zero tolerance for upside risk. Arguably, since then, there have been some upside surprises, and I see that you're forecasting one on tradables and you are tolerating it. So on one hand you say you've got no tolerance for upside risks. Do you not think that you are tolerating some in this outlook by not hiking now?

Adrian Orr:
We're balancing the upside versus downside risks, so that's one. If we cherry-picked just the things that went up, then everything went up, I could cherry-pick things that went down and then everything went down. Unfortunately, we have to look at the aggregate on balance.
The point you noted on tradables, as well as the challenge for monetary policy is, we look at generalised inflation, we don't try and target a specific relative price. But we need to always have the confidence that a relative price change doesn't become generalised inflation.
We're saying with the degree of capacity, excess capacity and with our projected excess capacity ahead, we think we can weather through some of these relative price spikes at present.

Dan Brunskill:
Do you think you are more tolerant of upside risk than you were looking forward from November?

Adrian Orr:
Yes, we have talked about that. I believe that's the case, I'm staring at members of the Monetary Policy Committee. What I would say is, the data we have seen has given us more confidence around the outlook that we've held for over a year or so now. But it's much easier to be operating in the fact rather than the projection. And so that gives us more confidence that we're on train.
I mean, you picked one note. But GDP, boom. Actual headline inflation, boom. Many, many things have gone in different directions. Boom was quoted as down, by the way.

Dan Brunskill:
Final question I guess for me would be, forecasting a price shock from shipping, that sounds very reminiscent to what happened just a couple of years ago. You are confident that this spike in shipping costs. I mean, how much do you think shipping costs contributed to the initial inflation problem, and why are you confident that this one won't?

Adrian Orr:
Yeah, thank you for bringing it up. I have to say, it was one of the most interesting components of a monetary policy committee of recent times, where we got to be hydrologists and mariners as we discussed global trade.

What we are saying here is, it's a wonderful example of a known shock. It has happened, so it's no longer a shock, but we then have to make assumptions about it. And the assumptions we've made is that it will remain a shock, IE, the relative price goes up for some period. And then it mean reverts when things normalise, whatever that looks like.

Our assumption is that's done and dusted over the course of a calendar year. If it persisted longer, we would then be saying, is it leading into broader inflation pressures if it persisted shorter? So it's just one of those things that we have to look through initially, and think hard around what are the second-round impacts?

If people jumped on it and started raising all costs of anything imported because of a one-off price shock, and then all businesses started passing those costs on, that's the type of inflation worry that we have. At the moment it's a relative price shock with some assumptions made.

Sam Ollie:
here again, from One News. What does the closure of Newshub and struggling advertising for other businesses say about our economy?

Adrian Orr:
First, I just want to say it's really tough news, and I feel for anyone who receives redundancy notice like that, like the Newshub people. We greatly value the media, the press. Society needs the media and the press, and so that's ... My heart goes out to the team.
Around some of the reasoning behind it, around what you talked about, without doubt, less demand means less revenue for advertising. Which means less revenue for people who survive on advertising revenue. This is part of an economic cycle. So that shop has run its balance sheet as it has, and made their decisions.

Sam Ollie:
Sorry, just to clarify, what do you think that says about our wider economic situation?

Adrian Orr:
That it is basically behaving as anticipated. Economic demand is slowing, and we are seeing excess supply starting to emerge, rather than the excess demand that is inflationary. We're going into a disinflation. We are in a disinflation period.
We anticipate to see lower than otherwise wage expectations, unemployment starting to rise. These are in our projections. Businesses not investing where they may have or not. These are demand decisions that monetary policy is one factor on it. So these are different examples.
Cool. I think we're all done, are we?

Sam Ollie:
I've got a couple more, unless anyone else.

Adrian Orr:
Okay, go ahead.

Sam Ollie:
Are you sure? These are from Katie Bradford, so apologies if...

Adrian Orr:
Hi, Katie.

Sam Ollie:
Going back to mortgages, are you seeing an increase in people in mortgage distress?

Karen Silk:
Yeah, so definitely, the information coming through from the banks shows that arrears are continuing to grow, and that's what we would expect to see at this point in the cycle. We are probably about 80% of the way through the pass through of current mortgage rates, so rollovers. So we would expect to start to see some of this continue to grow.
They're still at relatively low levels, so there is no concern from a financial stability perspective around that, as has been pointed out before. However, households, there will be some households who are really struggling. The banks are well-positioned to support their customers. And as Adrian said before, we strongly advocate that if someone is facing pressure, they are engaged with their bank and are seeking help from them.

Sam Ollie:
And just touching on migration again, do you think there needs to be a cap or tighter policy controls around migration considering the impact that's having?

Adrian Orr:
Yeah, we don't have a view, that's outside of our bailiwick. I would have to say it's incredibly hard as well, because you can stop new people coming in, but you can't stop current people coming and going. And so a net migration task is, I don't think any country's really achieved it. I'll be proved wrong.

Sam Ollie:
One more, unless anyone else. Okay, cool.
You've kind of touched on this, but is the economy slowing at the rate you expected, and how long can we expect it to feel sluggish for?

Adrian Orr:
So the very positive part of our economic projections are our official cash rate is not projected to be rising subject to all of the uncertainties. Economic growth is actually picking up, we're talking about just over 1% economic growth the calendar year ahead, rising back to our potential growth rates of around 3% for the following two years ahead.
Throughout that, employment growth is positive. So it is a soft landing scenario that we have in here, but it does mean subdued demand. We spend, therefore we are. It just won't feel as much fun. But that is necessary to remove the evilness of inflation from out of the economy.

Dan Brunskill:
Dan Brunskill from Interest again, with a question I just remembered. The neutral OCR has been creeping up, the estimates of the neutral OCR, but it hasn't between November and February. Does that sort of signal that you're happy with where the neutral OCRA is, and you don't think there are going to be further revisions?

Adrian Orr:
It's one of those variables that we would reflect on from time to time. Either immediately if there was something, an amazing, immediate shock obvious that might affect the real underlying growth rate of the economy. But other than that, it's something that we estimate, and then like to think we can leave it set for some period of time. So there's been no particular news we've made us want to revisit our assumptions?

Paul Conway:
No. We are comfortable with two and a half this projection, let's see what happens down the track.

Karen Silk:
And it's not something that impacts on the shorter term either. It's a reflection of longer-term outcomes. So that's why you also need to think about it. But are we comfortable we're at restrictive levels? Yes, absolutely. We're absolutely comfortable.

Dan Brunskill:
I guess that's what it leads onto. Because you are forecasting inflation being in the target range, but the official cash rate still being at a very restrictive level relevant to the current neutral OCR. So are you confident that you can hold rates as high as you've forecast, when inflation will actually be in the target range? Considering long and variable lags?

Adrian Orr:
That's right. So more confident, rather than less. One hopeful, wonderful thing that will happen when actual inflation's back inside the target inflation expectations, we'll be incredibly well-anchored against that 2% midpoint. And when you've got inflation expectations well-anchored, monetary policy is easier. We get really scared when that starts leaving home base.
Kia ora. Wonderful, thank you very much everyone. And I want to thank the Monetary Policy Committee. I do actually want to note that Peter Harris, Peter, thank you very much on behalf of all of the people at RTRO in New Zealand for your significant term of service on the Monetary Policy Committee.

I say that assuming there'll be no immediate economic crisis where we have to bring you up again tomorrow. But kia ora sir, your wisdom has been wonderful to be around. So thank you, Peter.

And a shout-out to another, Assistant Governor Simone Roberts, who is running the New Zealand Taupō Ironman this weekend. Here we go. Unlike this lot.
Got it.