November Monetary Policy Statement and OCR

Adrian Orr:

Well, kia orana tatou katoa toa, tēnā koutou katoa. Welcome to Te Pūtea Matua, the Reserve Bank of New Zealand and our Monetary Policy Statement. The last one for this calendar year. Obviously we're here with our Monetary Policy Committee members, which is a wonderful have. Thank you for all the hard work and effort and insight over the last week and a half. And I'm joined on stage with Assistant Governor Karen Silk and our Chief Economist, Paul Conway. That is us. So what have we done today? The monetary policy committee agreed to reduce the official cash rate by 50 basis points to 4.25%. Annual consumer price inflation has declined and is now close to the midpoint of the committee's, 1 to 3% target range. Inflation expectations are also close to target and core inflation is converging on the midpoint, so it's very positive position for the committee to be in.

If economic conditions continue to evolve as we outline in our document as projected, the committee expects to be able to lower the OCR further in the new year, in fact, early next year. Economic activity in New Zealand remains subdued and output continues to be below its potential. With excess productive capacity in the economy, inflation pressures have eased. Domestic price and wage setting behaviours are becoming consistent with inflation remaining near the midpoint of our target range. And the price of imports has fallen, also contributing to lower headline inflation. Looking forward, economic growth is expected to recover during 2025 as lower interest rates encourage investment and other spending. Employment growth however is expected to remain weak until at least mid 2025 and for some, financial stress will take time to ease. And this is the usual lag between activity, employment and financial well-being. Globally, economic growth is expected to remain subdued in the near term. And geopolitical tensions and conditions and general policy uncertainty could contribute to economic and inflation variability, volatility over the medium term.

The monetary policy committee agreed that having consumer price inflation close to the midpoint of its target band puts us in the best position to respond to any shocks to inflation, looking forward. Before I go to the audience for questions, I do want to thank all of those businesses throughout the country who provided their insight and wisdom to our staff. We visited 85 businesses across the motu. And thank you so much for giving us your time. We have been listening and we have played back what we heard and how we see it fitting with the economy, within our monetary policy statement. I hope that you see yourselves reflected as appropriate. It also is with great pleasure that today we have special guests with us sitting here in the front of the audience. We have the winning monetary policy team from Christchurch College Girls High. Congratulations team. This is a national competition competed across senior secondary school economics students. You took out the best. You did a fantastic job and I hope I'm looking at future central bank governors here in the front row. And with that we're open to questions. Thank you very much.

Media questions

Media:

Thank you. Matthew Brockett from Bloomberg. Your new projections suggest that you are going to slow down the pace of easing. I'm wondering if you could confirm that. Should we expect a step-down to 25 basis point moves from here on in?

Adrian Orr:

Yeah, so I think that's a misnomer and I'm pleased you brought that up Matthew. If you look at, I think it's as early as page... Inside cover, you'll see that our August monetary policy statement had us easing conditions. Our current projection for the November MPS is a steeper decline in the official cash rate, not a shallower decline than our August MPS. And we've also talked about it explicitly about moving early in the new year. So I refer you to figure one and you'll see a steeper chart. I do note commentary that has come through the market, following what you're saying, but that's not the intention of this document.

Media:

So to be clear, you're talking about another 50 basis point step in February?

Adrian Orr:

Our forward projection is consistent with the 50 basis point, but it's also conditional and economic projections panning out consistent with our activity.

Media:

Okay, and just on your inflation track that seems to have nudged up slightly and you have inflation staying above 2% for several years. Could you perhaps explain what's behind that sort of nudge up in the inflation?

Adrian Orr:

Yeah, and thank you again. So our forward projections over the next 12 months, there's some things that we know will be happening. And there are also impacts of previous quarters of the inflation numbers falling out of the measurement of annual change. So over the next 12 months you'll see that inflation remains well within the 1 to 3% band, but it bobbles between 2.5 And 2%. Why 2.5? In large part, that just reflects a significant fall in the import price we experienced in September this year, falling out of the calculation. So not too much more than the annual mathematics there. Beyond that, once you are beyond some of the near-term mathematical challenges, we see inflation being firmly anchored at the midpoint at 2%.

Media:

I'm Tom Pullar-Strecker from The Post, there appears to be just sort of one reference to ongoing uncertainty surrounding US foreign and trade policy and the MPS on page 27. Does that sort of adequately reflect your levels of concerns about possible implications of those?

Adrian Orr:

I'm not sure whether a word count adequately reflects it. I would say no if you're saying there's only one word, but I believe it's well baked in to our projections. We talk about a subdued global economic growth environment. We talk explicitly about China and the US having much weaker economic growth in our projections and in our note. And we talk about the insipid growth Europe is facing. So it is a weak global environment. We also talk about increased volatility expected in relative prices and aggregate inflation. What does that mean? It's economic jargon for a lot more price variability if and when global trade shifts, and we're seeing news of that type of policy uncertainty already happening. And also climate change challenges around food and energy. The things we can say with certain is in the near term we are comfortable around our path for policy. In the medium term globally, all central banks are expecting more volatility and relative prices because of these geopolitical tensions and climate change.

Media:

Just a second question. There's quite a step-down in your GDP forecasts for '26 and '27. As I understand it, that mostly reflects [inaudible 00:08:15] declined expectations around immigration, partly sort of weaker than expected productivity growth. How much concern do you have in particular about weak productivity growth, how that might affect fiscal outcomes and how that might feed back [inaudible 00:08:31] to your work?

Adrian Orr:

Yes, I mean... Great question. The lack of productivity growth anywhere outside of the United States is a global concern, particularly with the ageing populations. As you've mentioned, challenging fiscal positions, rising debt globally, I mean New Zealand is in one of the relatively better places. But certainly a lot of countries are running against these fiscal concerns. That is itself is being reflected in the rising longer-term interest rates in the US for example. Both nervousness around rising inflation pressures of productivity doesn't occur and also risk premia around the debt. With us, monetary policy has to play the card it's dealt with. There's very little we can do with monetary policy other than maintaining low and stable inflation to lift productivity. But if we had higher productivity in this economy to achieve lower inflation, we wouldn't have to see negative growth. So it is a real policy challenge for this country and for the vast bulk of the OECD.

Media:

Lucy from Reuters, you cut by 50 basis points. Was there any consideration of going by 75 basis points today or even cutting by only 25?

Adrian Orr:

No, 50 seems to be where it landed. We spoke very openly about how we saw the economy. We've talked about still being in a restrictive position, so even with 50 basis points we still remain somewhat restrictive. There's a significant output gap, significant spare capacity, so 50 felt right. And particularly with a forward track that leaves the door open for a further 50 if the economy pans out as anticipated. So is that seem reasonable?

Karen Silk:

Yep.

Adrian Orr:

Yeah, I mean the committee [inaudible 00:10:27] strong consensus around it. Very small, very limited discussions of 25 or 75.

Media:

You're not meeting for another three months. Does that make it more challenging to make the decision today? I mean how much of what could... And there's a lot that can happen between now and February. We've got an inauguration, we've got a whole bunch more data.

Adrian Orr:

We've got a summer break.

Media:

Some of us anyway.

Adrian Orr:

Yeah, yeah, so it doesn't make it harder because rest assured the Reserve Bank is on watch, the whole time. Whilst we have scheduled meetings, we can meet at any point in time. At the moment we don't expect that we have to, because obviously we're not forecasting a shock by definition. Should our assessment of the economy change dramatically through particular events, then as quick as a phone call, the committee is back together. And we have done that in the past, we were incredibly mobile and busy for example, during the opening periods of the COVID shock a couple of years back. It's probably also why we are trying to speak as explicitly as we can but not being heard so well around our forward path. Actually having interest rates coming down faster than in August, you know we're saying... And that is and has been priced into the financial markets for some time.

Media:

Thank you, governor. Luke Malpass from The Post. One of the things I noted was that you made a couple of sets of adjustments around modelling of GDP. And in particular some of the assumptions around productivity around the kind of going into and coming out of the COVID-19 lockdowns. Could you just unpack that a bit for us? What does that mean and what's that mean for your judgments going forward?

Adrian Orr:

I'm going to pass over to Paul Conway who used to live, breathe and understand productivity. Now he's just a chief economist.

Paul Conway:

So the earlier question from Tom was spot on. We have reduced our productivity growth out over the medium term by a couple of tenths of a percentage point, which is the main reason why we've got mildly slower GDP growth further out. We've also changed the way that we calculate potential, so that it is more responsive to population, changes in population growth, particularly coming from migration. We feel that's just more realistic the effects that new people coming to New Zealand have on our productivity and therefore our potential output performance.

Media:

What are some of the drivers, just the highly... What are some of the drivers of that decrease in productivity?

Paul Conway:

You're talking further out? It basically reflects the fact that productivity growth in New Zealand, pre-COVID and certainly through COVID has not been particularly impressive or bright at all. But productivity, it's a difficult thing to project, to sort of forecast, but our past performance is an important guide to what our future performance is going to be. Sort of consistent with how the Treasury's talking about productivity at the moment as well. So those are the main drivers of that.

Adrian Orr:

And just for the sake of clarity, it's about... It's no single particular policy move of recent in any sense either the central bank or anywhere else. It's more looking at the long-term time series of behaviour that has gone on, added with sub-cyclical behaviour around the growth of the labour force or not.

So it's something you discover through time and need to continuously adjust what improves productivity, capital deepening, and doing the same thing better and doing better things.

Paul Conway:

Technological adoption.

Adrian Orr:

Capital deepening would be a beautiful thing to see outside of the housing market.

Paul Conway:

We would love to be surprised on the upside around our productivity growth projections.

Media:

[Maori 00:14:31], governor, I'm Natasha Harris I'm from 1News, acting for Katie. On inflation, what particular areas are you still worried about?

Adrian Orr:

Thank you Natasha. So great question. We've got headline consumer price inflation at 2.2%, so they think, "Job done." No, it's never done. It's always a moving feast. 2.2% is made up of two halves, one of which is tradable inflation, and import prices have fallen significantly and that has helped bring headline inflation down. But we have little influence or none over global import prices. So we can't rely solely on that to keep us at 2.2. What we are looking at, the other half of it is domestic or services inflation, the homegrown stuff that is driven by the resource use or spare capacity in this country. And that is still heightened, that is still... You know, the core inflation measures are around 3%. The imported price inflation are negative and add the two together and you get your 2.2. So we are confident that the domestic homegrown inflation pressures have and are continuing to ease. They just aren't there yet at the midpoint. Given the level of spare capacity and what we're doing with monetary policy, we feel comfortable that, that will unfold.

Media:

Okay. Another question. Thank you. If unemployment hits 5.2% next year, how many more people do you expect to lose their jobs? Second part, any concerns it'll go higher than that?

Adrian Orr:

I can't do the math directly off my head around percentage points, but Paul can.

Paul Conway:

We've actually revised down unemployment forecast. It was 5.4 in August and now it is 5.2 and that equates to an extra 11,000 people being unemployed over the course of the projections.

Media:

Bernard Hickey from The Kākā and the Spinoff. Governor, are you concerned at all about administered price inflation in the next few years? Because we've got NZTA proposing a 70% increase in public transport fares and Commerce Commission ruling significant increases in electricity prices.

Adrian Orr:

Yes, is the answer. Monetary policy there's an interesting chapter in our beautiful document, the monetary policy statement, I forgot to advertise it. There's a wonderful section in there that talks about what sectors of the economy are more or less sensitive to interest rates. Some sectors are very insensitive to changes in interest rates because they're on a different time horizon. They're about, as you say, administered prices or being impacted by specific events such as insurance price changes, and those are the sticky components. Those are the ones that are always hard to wear down and what it does mean is that other parts of the economy have to work harder, other relative prices to keep aggregate inflation lower and stable. This is a massive challenge. Again, I'm going to go back to OECD countries of what we have, transition in climate change and relative price shifts, user charges around infrastructure deficits and lack of headroom on fiscal policies.

You're going to see a lot of change in relative prices and who bears the burden of that on the way through. So our document, to the best of our knowledge, what we know around administrative prices are in there, but that doesn't get you very far forward. What we have to be prepared for is how to manage relative price shocks. We are less worried now than if you'd asked me the same question as six months ago because we are now in a low and stable inflation environment. That gives us more room to be able to look through some of these relative price shocks without fear of having expectations unanchored and being back in that inflation cycle.

Media:

Just one more, governor, do you think that climate change and the apparently lower productivity post-COVID along with ageing populations and the geopolitical risks particularly tariffs, could increase the neutral interest rate in the longer run?

Adrian Orr:

Yeah, good question. Do you want to have a crack at that, Paul?

Paul Conway:

Yeah, yeah, so the neutral interest rate is in the OCR space. It's where the OCR is neither contractionary or expansionary. It gets pushed around by a whole bunch of factors. I think in New Zealand a lot of those factors tend to be global, so the fact that global neutral interest rates have come down quite a bit over the last couple of decades has been the predominant driver of lower neutral interest rates here as well. Looking forward, you can make arguments on either side of it.

You can say that people getting older is going to increase savings, which is going to put downward pressure on the neutral interest rate or if productivity does improve investment is going to put upward pressure on the neutral interest rate. What we've actually been seeing is a bit of an increase from a trough that occurred what, a couple of years ago, I guess. But again, it's a difficult thing to forecast. We use a whole bunch of different ways of measuring it and projecting it into the future, but yeah, it's a really active part of our research agenda here at Te Pūtea Matua at the moment.

Media:

Jenée Tibshraeny from the Herald, what impact do you think higher global long-term bond yields will have on mortgage and term deposit rates?

Adrian Orr:

Yeah, that's an excellent question Jenée, and I'm going to pass over to Karen. You're in.

Karen Silk:

Yeah, so when we think about what impacts on wholesale rates on the yield curve, certainly the longer date or the longer end of the curve, longer dates is definitely impacted by what is happening in offshore. So increasing bond yields does have some influence and we've seen that already in terms of what is happening with the yield curve today. Where we can have the greatest impact with the OCR is obviously in the shorter end of the curve and our expectation is that, as the OCR comes down, we will continue to see a fall in those wholesale rates. From that perspective, how does that flow through to mortgage rates? Well, obviously wholesale rates are a significant component of deriving the mortgage rates, but there are other influences as well, and that goes to the mix of funding that banks have. Term deposits' increased reliance on that probably means, that is putting some upward pressure on some of those funding costs. And then obviously the other big component to it is what margin banks choose to earn on those mortgages as well.

Media:

So having some upward pressure on funding costs just for retail people who will be interested in the OCR cut, do they need to temper the expectations around mortgage rates falling?

Adrian Orr:

I think that is the case and that's what we've been hearing through the media et cetera. I'm really pleased with the way these messages are getting out. There's some nice stories around what is the OCR and how does it impact. In our forecast, just to be clear, the average mortgage interest rate will decline from 6.4% to 5.8%, and that is with the official cash rate heading down to the 3% somethings. So that gives you a sense it's not a big decline in the average effective mortgage rate that is out there. Why is that? In part because of the other costs to bank funding that will hold that up.

Of course there's always bank margins and bank competition. So it's not... In a competitive world of margins, don't have to stay exactly the same, and I'm pleased to see banks continuing to move. What we've also observed globally and certainly here, especially here in New Zealand is people have been very wary of only rolling over onto quite short-term interest rate fixes. Because everyone is hearing these stories about interest rates going to be lower in the future. Their enthusiasm may be tempered a bit, now that they've seen other global influences going on. So we are assuming people will start to move more into longer dated mortgage fixes, but the thrill might not be as big as what it looks like on the OCR.

Media:

Sure. Just one more thing. I appreciate the upward pressure on banks funding costs as just discussed, but banks near interest margins, the major banks, we're still at 2.4% in the September quarter, off the top of my head. Do you think that is the level of NIM you'd expect at this point of the cycle?

Adrian Orr:

I really hope that increased demand for mortgages means increased competition and an increased pressure on net interest margins. I think over recent times it hasn't really mattered what the bank prices offered. They just haven't written much business. So as the level of business activity picks up, one would hope competitive pressures pick up and we see margins more normalised, is that the right phrase? We were trying to get away from normalised. Decrease.

Karen Silk:

At 2.4 that's still above the long-term average. So there's definitely, even if they were to move back to just that level, there's capacity therefore that pull rates down further.

Adrian Orr:

We've got a very wide range of work, large and wide agenda on increasing promoting competition in the banking sector without risk to financial stability. They are joined together, self-supporting and that's across all that we're doing and that's talked about a lot across our statement of intent, our annual report. We have to talk more about that next week actually at the FEC in our annual review.

Media:

I was curious to see that your GDP forecasts through next year, 2026 through to mid '27, they're all 0.6 and then you actually have it falling. Does that mean that 2.4% annual growth is where you see maximum economic growth?

Adrian Orr:

I'll get Paul to come across to the direct forecast. I'll just eat a bit of a humble pie on behalf of the economics industry to begin with. The 0.6 quarterly do actually compound up to more than 2.4, there'll be 2.7 somewhere near 3. The second part around it is the economics industry are much better at picking the direction rather than the pace. So I want people to take a positive sense of this. We are confident the direction is north, that economic growth will be picking up where economists are often surprised and as often reminded to me during our monetary policy committee meetings by members. We are generally surprised to the upside once an economic turnaround comes. So our 2.8% average growth, that's an outcome of our modelling frameworks and largely reflects in part the insipid productivity growth but also reflect some of the constraints that are still on households around spending. Have I stolen all your thunder, Paul?

Paul Conway:

Yeah, I don't think there's much more for me to add to that, really. We do have growth a little ahead of potential output as that output gap is closing and then once actual growth sort of converges to potential, then growth becomes equivalent to growth and potential output. That's why it's got that little drop off.

Adrian Orr:

So it's as much about how our forecasting framework works rather than pretending we've got some amazing insight in growth in 2028 or 2027.

Paul Conway:

Yeah, I'd echo the governor. It's an inexact science. The fact is growth is picking up from now into the future. And where it ends up in the future, well, time will tell.

Media:

Did you have time to look at what stats put out this morning, which suggests that growth may actually have been a little bit higher than the official numbers have suggested?

Adrian Orr:

Yeah, so I feel a little bit let down. I should have been happier but it's too late. It's already in the past. I'll have to revise my utility function, but we've had a look at it. The important thing for us immediately is that inflation is still declining. The second important part is that the volatility we see in revisions to stats, what we're looking at, is well within the usual behaviour of lagged data being revised. That is why we spend so much time looking at near-term, real-time indicators of economic activity rather than relying on historical measures of doing it. And then the final thing that gives us great confidence before is that inflation is declining and it's declining broadly at the pace we expected. So it suggests we haven't been too far off the mark on measures of excess capacity. So that gives us confidence. No, we haven't gone into the grubby details of it yet and I know that some will be on the supply side of the economy and some will be on the demand side. And that's really important to us trying to work out the mismatch.

Media:

Hi Tracy from Bloomberg here. Excuse me. Just back on the neutral rate, in this cycle, when do you expect to get to neutral?

Adrian Orr:

We expect to be within the bounds of uncertainty of neutral by end of 2025, and then [inaudible 00:29:13] around between... Neutral is somewhere between two and a half and three and a half. That'll give you a good idea, then you can eyeball that.

Media:

[inaudible 00:29:20] I was just going to follow up with that. It's a bit still quite a big range of two and a half to three and a half.

Adrian Orr:

Yeah, that's the nature of the beast. It's pretty hard when you're North Star, can't be measured with accuracy. That's why we have to move carefully and continuously recheck and update. Look at more than just a single variable called a point estimate of a neutral interest rate. And again, judging by how the inflation pressures are behaving relative to our measure of demand, we are feeling confident we're on course.

Paul Conway:

So the way the economy reacts to changes in interest rates tells us, it gives us an indication of how far north or how close we are to neutral. So it's a matter of feeling your way as much as having a line in the sand called neutral. There's a band around it and we make the best of what we've got.

Adrian Orr:

And again, Tracy, there's a really interesting section in the monetary policy statement. It's all really interesting, but a particularly interesting section in there around the measures and also impact of real neutral interest rates. It's quite a nebulous concept. Keeps us in the job.

Media:

[Maori 00:30:34], governor. Jemima Huston from RNZ. Just on the neutral rate and going back to the discussions about US foreign trade policy. Is there any risk that the OCR might not go as low as expected or might go back up as a result of those tariffs? Are there any sort of risk?

Adrian Orr:

I would say at this point we can rule out go up in the near term without doubt. We have an independent monetary policy, we have our own inflation pressures and we're on top of that very easily. So there's no concern about that. But there is broader concern around the volatility around prices and really the tit-for-tat nature. These tariffs mean in a simplest sense, less productive capacity, which means more inflation per unit of output possible. So it's not a good thing. The general consensus globally is that the tariffs would put some upward pressure on the level of prices internationally. And that's in part why you've seen longer term US interest rates rise, in part. There's also risk premia et cetera related, but that will be lost in the wash of everything else that we're looking at through time. We're past peak globalisation without doubt.

Media:

And just one final question. The prime minister this afternoon in the stand-up with media has said that the government's good work on fiscal policy is helping to lower inflation and rates are coming down as a consequence. What is your reaction to that?

Adrian Orr:

Success has thousands of parents, so I'm very pleased to no longer be an orphan.

Media:

Hi, Dan Brunskill from Interest.co.nz. Couple of questions both follow-ups. You talked about the risk of tariffs being inflationary, but in the text you describe it more as volatility. What risk, if any, do you think that it could ultimately be deflationary just for New Zealand, not necessarily global-

Adrian Orr:

Great question. There are so many different scenarios and you're spot on. The first long term all other things unchanged scenario is you've reduced the productive capacity of planet Earth, so there is some upward pressure on price levels, all other things unchanged. Of course all other things never remain unchanged. But getting there between now and that long-term equilibrium story I talked about is one volatile ride. For example, tit-for-tat tariffs could end up with some exporting nations dumping goods.

Dumping goods that don't have tariff barriers. So cheap EVs to all nations other than the US and Europe would probably have a downward pressure on prices in a lot of other goods and services. So that's really going to depend on the tit-for-tat behaviour and the ability of China, for example, to continue selling to the nations it currently does or looking for new markets. There is no new market that comes anywhere near close to a substitute for the US market. So that does mean surplus capacity and potential for dumping, that's the downward side. The upward side is more of a long-term equilibrium. We don't see it as a concern for New Zealand's inflation because we set our own monetary policy. It just means that there may be more noise and our level of interest rates that we would normally use may differ, but we are focused on the same outcome, low and stable inflation.

Media:

My other question is also about deflation. A few economists out there are worried that we're going to drop through the bottom of the target. You obviously don't forecast that, but is that a concern for you and are you aiming for the neutral rate admitting we don't know exactly what it is or are you aiming to go below neutral?

Adrian Orr:

We're hoping that we can smooth paste ourselves into a nice neutral world, which is largely given from our starting point close to the midpoint, given where interest rates are heading and in the absence of future shocks. And we're in a really strong position to be able to have that low and stable inflation interest rates broadly at neutral and employment near its maximum sustainable level. Wouldn't that be nirvana? Now I've said in the absence of ongoing shocks, headline CPI inflation can easily fall below the band because it is so volatile relative to core inflation. The dramatic fall we saw in import prices is the main reason we're at 2.2 at the moment. So that's always going to be the noise. If you look at back the history of this central bank's inflation targeting, some of the best math I've ever heard, 4 + 1 = 2. 4% domestic inflation, 1% imported inflation adds to a midpoint on the target. So we can't rely just on imported inflation.

Media:

So would it be fair to say that your concern about deflation missing the bottom of the target is quite low? That's not a high concern for you?

Adrian Orr:

It is low. If we've spiked below it'll be because it's spiking, not because of the core underlying components of the economy at the moment in the absence of some other shock.

Paul Conway:

So it's not in our forecast and we don't have the OCR dipping below neutral in our projection of the [inaudible 00:36:07].

Adrian Orr:

Yeah.

Media:

You talk in the statement a lot about the subdued economy, the dairy industry is doing really well. We've got forecasts of high milk payout prices. What sort of risk does that pose? Is there an upside risk that it poses for you or a challenge?

Adrian Orr:

No, I mean everything's a risk. That's a good risk. It means that there will be reinvestment and aggregate spending going on in the economy giving us more confidence about our projection for economic activity rising. It's an important sector of the economy, but it's not alone. The subdued nature, if I think about it is more about our starting point, debt laden households, rising employment still for the next six months before it starts easing off, and interest rates coming down, but still remaining at a slightly restrictive level. It's not a tender dry place that's about to take off. So it's really good to see some sectors in the sunshine, and I'll stop my farming analogies there happening.

Media:

Tom Pullar-Strecker from The Post again, just a sort of maths clarification actually going back to the response to Jenée's question. That increase in GDP 0.6 over four quarters, I appreciate the benefits of compounding interest, but it doesn't compound much at that level. That gets to a growth rate of fractionally over 2.42% per year. So I just wanted to check that that was the forecast and not something close to 3%.

Adrian Orr:

I will hand over again to... If you're compounding, you've done that, Tom, that's great. Mostly what I was trying to suggest is the direction is as important-

Paul Conway:

To table 7.5. We've got annual GDP forecast there and it is 2% in '26, this is March years, and 2.4% in '27.

Adrian Orr:

With a really wide health warning around it, the size of a cigarette packet. Cool.

Media:

Hi.

Adrian Orr:

Hi.

Media:

My name is Alice. We're from Christchurch Girls High School. My question is coming from Canterbury, how was the South Island represented in your stats and your decision about the OCR compared to the North Island despite having a smaller population than them?

Adrian Orr:

Wonderful. Smaller but smarter of course, [inaudible 00:38:41] you've won the monetary policy, so it has to be IQ adjusted. We set monetary policy for the whole country. We measure aggregate activity, aggregate employment, aggregate production, and the South Island boxes above its population weight relative in terms of total production. So it's a very critical part when we put together our policy. You don't have your own exchange rate, you're still using the North Island currency, so you have to still have the same interest rate as the rest of us, but we're trying to fix aggregate inflation.

I have to say this while I'm talking of South Island, so many folk have come from your region who work here at Te Pūtea Matua, so you certainly have an impact and we spend a lot of time talking with businesses in the South Island to understand how and where they're feeling. One of my annual [inaudible 00:39:38] is to speak to a very large audience, [inaudible 00:39:41] the Christchurch Chamber of Commerce for example, and they're never short at providing free and often unsolicited advice. So you're heard loud and clear. Your energy, net surplus of course keeps the lights on for us. Thank you very much.

Paul Conway:

Can I just add as someone from Invercargill, so Christchurch was sort of up north for me, but one thing we did visit a lot of businesses down in the South Island. And it sort of goes back to the earlier question about the dairy industry, the farming sector, high commodity... Or commodity prices that are increasing. A sense from those business visits was that demand in the South Island currently was a little bit stronger than what it was in the North Island. And there's a few lines on that in the monetary policy statement.

Adrian Orr:

Cool. Probably a little overweight on the [inaudible 00:40:27] behaviours at the moment, [inaudible 00:40:29] something we can all debate. Also, we've got one more question. Yep. Wonderful.

Media:

Thank you. We are starting to see some signs of life in the housing market. What's your projection for house prices?

Adrian Orr:

Wonderful. You must be from TV1.

Media:

[inaudible 00:40:44].

Adrian Orr:

The first thing, so part of the pain of trying to predict the future is house prices are such an important asset. We look and talk about what we think is happening to the value of that asset. So in our projections we have even a bigger health warning around accuracy than GDP. We have about a 7% nominal growth rate in house prices, for each calendar year, Rebecca? Yep, now most people will be really excited about that relative to a history that sounds insipid. Sitting here, why 7% and why not back to 20% where we like to see it? Because of our starting point.

Our starting point is one where house prices are already at the top end of anything we model as sustainable. I think I don't have to explain that to too many people. The other part is household indebtedness is still high and although interest rates are coming back, they're still high relative to some of the historical rates that new borrowers have been used to. We've also got our loan to value ratio and we've got a new debt to income tool in there as well. That will constrain some of the frothiness that we saw in lending and the FOMO behaviour going on into the last house price cycle. So I think it's a nice steady story, but we stand ready to be surprised.

Karen Silk:

The other thing just over the next 12 months and Adrian referred to it earlier, is that lag that you have in the labour market relative to increasing activity in the economy. And that goes to confidence. So until we start to see those improvements in that area as well, you just won't see the same level of confidence to invest more.

Adrian Orr:

Really important point. Employment is no longer the constraint on businesses, or finding labour is no longer a constraint. So that makes it a different bargaining position from there.

Wonderful. Okay. Just before I go, I just want to mention a couple of things. The first one is whilst I don't normally provide my travel agenda, I'm at the South Pacific Central Bank Governors Meeting as of tomorrow, so I will not be at the Financial Expenditure Committee monetary policy discussion. Fortunately, we have wise smart people, Deputy Governor Christian Hawkesby and Karen and Paul will be fronting the questions tomorrow and I'll be there in spirit. I will be back for the select committee annual review, which is on the 4th of December. That's where we talked to the whole range of activities that we are doing. I also want just to reassure people and just coming through the questions, this bank does not close over summer.

This bank in fact has some of its busiest periods from here on through. We deliver the money in cash, we keep the financial system efficient and stable, and we operate the payment and settlement systems. And we also continue to monitor economic activity. So that is happening real time. We do not close the door and go away and come back February 19 and go, "Wow, I didn't expect that to be here."

We will be looking at it all. So just so that you understand that. And I also just really want to thank you all for coming today and those online. [inaudible 00:44:26]... We've been doing it tough over the last couple of years. We've been part responsible for that, but the higher interest rate inflation is evil. We have been making sure we can squeeze it out of the economy. I know it's been challenging for many, many people and will continue to be so over coming months. I really do hope people get some summer respite from this challenge. And in the best interests over the next couple of months, warm your cockles and please invest in places that raise the productive capacity of this beautiful country.