Media conferences

Adrian Orr:

Kia orana tatou katoa toa, tēnā koutou katoa. Welcome to Te Pūtea Matua. Today, the Monetary Policy Committee reduced the Official Cash Rate by 50 basis points. That takes it to 3.75% and reflects the fact that inflation continues to abate annual consumer price. Inflation is near the midpoint of the Monetary Policy Committee's 1 to 3% target band and New Zealand firm's inflation expectations are at target and core inflation continues to decline towards the target midpoint. This is a very positive position for the Monetary Policy Committee. The economic outlook is consistent with inflation remaining in the band over the medium term and that is giving the committee confidence to continue lowering the Official Cash Rate activity in New Zealand is picking up. However, spare capacity in the economy means that domestic inflation pressures will continue to ease price and wage setting behaviours are adapting to the low inflation environment and the price of imports has fallen further.

Helping headline CPI inflation to remain low, this economic growth is expected to continue over 2025. Lower interest rates will encourage spending, although of course elevated global economic uncertainty is expected to weigh on business investment decisions. Higher prices for some of our key commodity exports and the lower exchange rate will increase export revenues into New Zealand and employment growth is expected to pick up in the second half of the year following the growth in domestic activity. Globally economic growth is expected to remain subdued in the near term geopolitics, including uncertainty about trade barriers is likely to weaken. Global economic growth activity is also likely to remain reasonably fragile over the medium term given the increasing geo economic fragmentation that is occurring. Consumer price inflation in New Zealand is expected to be a little noisy over the near term that as usual, but remain within the band and that is due to a lower exchange rate and higher petrol prices. Some of those near term price pressures that we see, nevertheless, the committee of whom many we are fully represented in the room today are very well placed to maintain price stability. Having consumer price inflation close to the middle of the target ban puts us in the best position to respond to future inflation shocks. As we've said before, if economic conditions continue to evolve as projected, the committee has scope to lower the OCR further during 2025. Kia ora, thank you very much.

Media questions

Media:

Thank you. Matthew Brockett from Bloomberg. Could you perhaps just give us a little more on where you go to from here? Are you expecting to slow down with your rate cuts to move in 25 point steps or is a 50 point move still on the table?

Adrian Orr:

Yeah, thank you. So we put a forward path in our economic outlook and again, for those that are on television, should someone have been stuck on the wrong channel, do have a look at the monetary policy statement in there. We always provide what we call a forward path conditional on the economy evolving as discussed in this document, in this document, we are looking at lowering the official cash rate a little bit quicker than what we projected back in November, but that's around 50 basis points by mid this year around July. And in the document that comes broadly in 2 25 basis point steps, it doesn't stop there. We have our projection of the OCR being around 3% by year end.

Media:

And if you do slow the pace of your easing, could you speak to some of the reasons behind that is you've mentioned uncertainties around global trade policies. Would that be one of the reasons?

Adrian Orr:

Not so much. I mean we are well poised to deal with whatever the next unanticipated shock is really. It's saying that we feel that inflation is subsiding core price inflation is still above the midpoint and we are just easing with more regular graduation from here. But through it all economic growth is positive around the two and a half percent annual employment growth is picking back up, but inflation and the spare capacity is slowly easing.

Media:

Lucy from Reuters, we obviously have GDP data out at the end of December. That was worse than we expected. How much has that played into the decision today and the change to the OCR track lower?

Adrian Orr:

Yeah, I'll let Paul Conway, our chief economist talk about the excitement of official GDP statistics.

Paul Conway:

Thank you Adrian and Lucy. And yeah, it has been quite an exciting ride for those of us focused on GDP. So the revisions were very large this time around and what they meant was higher capacity pressures than we were first led to believe over 2023 and early 2024. And that was actually more consistent with inflation dynamics in the economy. So it sort of made sense that relationship between output capacity pressures and underlying inflation sort of snapped into shape for us. And then of course we had a bigger downward revision in GDP in the middle of this year, but net out the back of all of that and measure of the output gap was slightly more negative than in November, partly because of the revisions, but it hasn't made a huge impact on the forward path for capacity pressures in the economy. So it hasn't been a major driver of that change in the OCR track.

Media:

So do you want to just talk to what were the significant drivers of the changes in the OCR track?

Adrian Orr:

Yeah, so what we're looking at here is an economy that has the euphemism significant spare capacity. It means that it is growing slower than the potential growth rate and it means that work and investment activity is below what it could happen, what it could maintain without inflation. So we still have downward pressure on inflation that has been basically the same since last November. It's three shades of grey. Looking at the projections ahead, they've been remarkably similar. What Paul was saying was we, the central bank was really discounting the previous GDP material a lot because we saw far more inflation and pressure in the economy than what the official stats GDP stats were saying over the period 2024. We moved quite quickly when the high frequencies data started to decline in mid 2024 and that has proved correct. We were prudent to remain cautious as opposed to jump to the GDP status and then we took the risk of moving with the higher frequency data as we started seeing that come off. So general story is very much the same regarding the economic drivers and the inflation outcome and we've been very pleased that that has been the case. In fact over the last 18 months it has played out broadly as we have anticipated in part because we have been touch wood, the absence of major global shocks.

Media:

And just to clarify, you said you were expecting two cuts by July. The track kind of indicates a cut in April and a cut in May. Is that how the market will be reading it?

Adrian Orr:

I would assume so. That's right. The conditioner subject to the economy panning out as anticipated in this document.

Media:

Thanks Tom. AKA from the Post. I mean looking at the sort of the core economic predictions here, I mean if anything they might suggest A to interest rate cuts. I mean GDP growth is really barely tweaked and unemployment forecast from November hardly changed. The only sort of significant change in that core economic metrics is actually an increase in expected inflation this year. Yet we have the OCR track moving in the opposite direction to meet the market. I mean in retrospect, was the November OCR track perhaps a little bit more conservative than needed or what are we to make of those things moving slightly different directions?

Adrian Orr:

I would say the differences you just pointed out would not be noticeable from this distance. The OCR track is broadly well within any confidence interval of what we said in November. In November we had the Monetary Policy Official Cash rRate reaching 3% by about the end of this year, early next year and that's what it's doing now. The other part is we've moved on, we've seen more data, we've got more confident relative to what we had in November and that always that confidence will always grow with us.

Paul Conway:

Can I please make the point also that our projections are what we call endogenous. So if we hadn't had that tweak downwards in the OCR, then our growth path would be more different to what was there in November. So it's not like we just move the OCR path that kind of moves the whole construction around how we we're measuring the economy. So it all is consistent. Absolutely.

Media:

Hi Dan Broskill from Interest.co.nz. Nice to see you after a long time.

Adrian Orr:

It was a good summer holiday.

Media:

Yeah, yeah, I had one as well. I don't blame you. I was hoping you could speak a little bit to the balance of risks in this forecast. I know that by definition technical forecasts are balanced, but whether you could do some sort of a qualitative assessment of whether there's more risk on the downside needing more cuts or more risk on the upside needing to slow.

Adrian Orr:

Yeah, no great question and without doubt you're spot on. We provide the medium path we provide the one where we have gained consensus across the committee and around that we spend a lot, most of our time writing words about this may never happen, which is our record of the meeting around the risks. I think the easiest way to think about the risks we see in this document is more about the near term and the longer term. In the near term we've got an 0.3% GDP growth figure for the December quarter that's passed. We know the volatility in that GDP data. We've got a 0.6 for the quarter we're currently standing in. One risk is that it takes longer to get that plus point something because we are predicting we are past a turning point always really, really difficult in economic activity. The medium term, slightly longer term risks are related to first of all of course shock risk.

We're in the middle of this geo-economic fragmentation. We don't know what may happen with regard to tariff, but we know that it is going to slow potential global economic growth and that at the moment we've only got a pretty modest adjustment to investment confidence in here. We would have to look at whatever happened when it happens. The other part is that's one thing to the negative. The other part is generally once economies turn and the people get their tail up, you don't see a smooth two and a half percent growth rate going forward. You may see actually faster growth over the second half of this year once confidence is back more. I've spent seven years being told off of being poor at forecasting house prizes or housing activity. We've got a very modest growth in that and we've got still very constrained consumer spending. So I'd say in the near term it may take a little bit longer. People want to see other people spending before they do and then in the medium term it could come back quicker.

Media:

You've talked in the past about having this idea of least regrets. I'm wondering if you're still using that thinking framework and how it might apply in this economic context.

Adrian Orr:

So for this decision the least regrets, fantastic questions. The least regrets one is when you're really staring into the abyss of significant uncertainty, that's not this forecast. So there was really us thinking about what is the consensus, medium term projection, what are some risks? None of them are making us have to make a significant move left or so. Even if we played the mental exercise, if we had to buy insurance today, what would be insuring against? And that's unclear. In other words, you're in a pretty good position. I don't know how you'd buy insurance against future possible tariffs or insurance against faster than usual economic growth. So what's sitting in this projection really is an economy where the exchange rate is floating somewhere around fair value where interest rates are broadly coming back to neutral where the inflation rate is back within its target band and it's a benign period for a central bank decision framework. Of course something will happen.

Karen Silk:

And the thing to really think about and the thing the committee talked about was having the CPI close to the midpoint of our target band sets us in a position to best respond to any future shocks that might happen. So if you want to be able to respond to those uncertainties and there are significant uncertainties sitting out there, then we need to be, our best position is to be as close as we can to that midpoint of the target.

Adrian Orr:

And I'll just add one more thing and you can see that this was an exciting things that we were chatting about. We have bought ourselves a little bit of insurance in some sense the official cash rate is at 3.75%. That would be at the high end of a neutral range. We haven't rushed to three or something now why? Because domestic inflation or non tradable inflation is still elevated. It's just that we're confident it's going to keep declining. So if we were rushing to neutral with domestic inflation, north of 3% people would've been doubting our commitment to our target.

Paul Conway:

It was 4 and a half in the last CPI outturn that which

Adrian Orr:

Is the September quarter last year. Yeah,

Paul Conway:

Core inflation measures

Adrian Orr:

December, December quarter, September. Yeah, December or December, sorry, Q4 stats. Brilliant.

Media:

Jana Tini from the Herald. I'm just interested in the impact on mortgage rates. I think that's probably what people at home are interested in. On the one hand we have slightly faster easing, but on the other hand we have some upward pressure on global wholesale rates. So I'm just wondering how those two things offset and where you see both shorter term and longer term mortgage rates going in the next couple of months.

Karen Silk:

Yeah, you are right. So the OCR has the greatest impact that will have is actually on those short-term rates. So a falling OCR should see short-term rates start to come lower and will continue to come to move lower as you move out across that yield curve. It's very much influenced by what's happening with global rates. And so what we've seen there is market reaction to US policies reflecting in US interest rates and strength of that economy influencing higher longer term rates. And they're also taking into account just the higher levels of sovereign debt that sit out there as well. And so that's having that influence on the longer term. So from here we would expect to see the OCR continuing to have influence on those shorter term rates. So that's sub one year in particular part of the market. But I would say that the expectation of the longer term rates coming substantially lower is probably a lot less. Now obviously that depends on the funding costs for banks and that's again being influenced by what's going on in those global rates.

Media:

So when you say longer term rates, are you thinking longer than one year or longer? Longer.

Karen Silk:

When we are thinking around that 2 to 5, 2 to 5 year.

Adrian Orr:

Five year, 10 year US interest rates have been rising based around all the things that we've been experiencing, ongoing growth but also concerns around total debt et cetera. That's an important part of global funding costs. In here we have, and I'm going to warm Rebecca up so she can tell me if I've got it right or not, but sitting in here is an effective retail interest rate that does not shift significantly over the forecast period even though the official cash rate continues to decline. And that is because of exactly these factors. Now don't get upset listeners, this is putting downward pressure on mortgage interest rates. We expect to see that we have already seen some quite a lot in advance and also given that we talked about a similar profile some time back, we've had that down. What we will see is increased competition between banks as demand for lending growth because private sector credit growth has been incredibly slow and the banks will be sniffing and hunting and who knows, some of the future cuts to the mortgage rates may even come out of margins.

Karen Silk:

So the average, just to give you those numbers, the average stock rate for mortgages today we think is around 6.2. Over the next 12 months we'd see that drop to about 5.7. So there is some room further for that come lower and you've got roughly 50% of mortgages repricing over the next six months.

Media:

Hi Cushla here from One News. I've just got some questions from my colleague Katie Bradford, do you think the cost of living crisis is now over?

Adrian Orr:

No, the challenge with the cost of living crisis is we're saying inflation is low but the price levels are still high. When you are going into the shop, you're not going to get a discount because inflation is now 2%. You're just not going to have to pay a significant more in a year's time. That's what we're talking about and in this document and we really understand the cost of activity in this economy and globally is still high because of past inflation

Media:

And we've seen all major banks drop rates within minutes of your announcement, how much on average will people save on their mortgages do you think?

Adrian Orr:

We'd need to know what their mortgage is probably. I can't do that calculation off the top.

Media:

And is the amount of pain the economy suffered worth getting to this point?

Adrian Orr:

Has, sorry,

Media:

Has is the amount of pain the economy has suffered worth getting to this point?

Adrian Orr:

For us at the central bank we target low and stable inflation. That is the best and only thing we can do to maximise economic wellbeing. So job done or job continuing to be done by the central bank embedded in here is in some ways the good things that can happen once you back in low and stable inflation, economic growth will be picking up, employment growth will be picking up. That would not happen if high and variable inflation had remained.

Media:

Governor, Luke Malpass from The Post. Firstly I note there was some comments in the MPS about around 90% of new mortgage flows are fixed for one year or less in the history of interest rate targeting the Reserve Bank. Is that about the highest level you've just about seen?

Karen Silk:

I can give my view.

Adrian Orr:

Your view. Should I leave the room and give my view and then you come in, we'll see how it goes. Go Karen, I won't listen.

Karen Silk:

No, we'll say the same thing. It's very high. It is very high. I don't think I've seen it higher than that since fixed interest rates actually started to evolve in the early two thousands. So very quickly moved into that one to two year over two or three years heavily weighted towards that and it could be as high as 80% the other way. So this is very high

Adrian Orr:

In terms it's been rational. People have gone to the lower price and they believe the credible central bank saying inflation is going to come down and future interest rates will be lower. So that has been what you would expect to see. The challenge now is as people refi or if they start going longer term, they're going to get good advice from the banks. They're going to have to work their way through what Janae was talking about. This end's coming down, that end's going up. Do they sit there forever or do they grab what they can? Yeah,

Media:

Well I was just wondering, it seems like even highly rational behaviour but a very high percentage of highly rational behaviour.

Adrian Orr:

Can we also just say remember during this period lending growth has been extremely low. Yeah. So we need to remember that as well. The writing of new mortgages has been very low because even if you're in a 90 day floating mortgage rate, that was still uncomfortable.

Media:

And just on another matter, I noticed that you said that there'd been some external forecasts or research done that some of the tariff business around the world could knock about a percentage point off New Zealand's trading partner growth. I was just wondering if you can give us a kind of a real world sense of if that would to occur what that would look like in New Zealand.

Paul Conway:

Tariffs are complex, so the effects of tariffs on the New Zealand economy is a complicated thing that we need to see to really understand. So it's easier for us to say just based on modelling that other people have done globally on what the sort of global impacts would be. And that's, as you said, a one percentage point reduction in global GDP growth at its peak. We do have papers out there sort of suggesting what that would mean in terms of GDP growth in New Zealand, but we've reframed from putting that number in the document because we think there's a lot of uncertainty about it currently. But it's clear tariffs are negative for growth both globally and here in New Zealand. And the effect on inflation is uncertain.

Adrian Orr:

And just again, near term, long term is an issue to think about near term. First of all, what was the tariff? Who was impacted and what was the initial reactions? You could do scenarios where for example, China gets blocked out of trading elsewhere and we end up being the recipient of the dumping or excess goods. What's the immediate impact for us? Lower headline inflation. Longer term we can't trade with China and that would be upward pressure on inflation and global demand would be lower because of the production challenges that we've talked about. So the near term will be noisy, the medium term is less ambiguous. It's down for growth and upward pressure while other things unchanged for inflation.

Media:

Bernard Hickey for the kaka. Governor, I'm curious about Box A, which was very entertaining on the revisions to the GDP and in particular I told you there'd be a

Adrian Orr:

Reader, Paul,

Media:

I'm loving Box B too, but let's do this first Box A the middle of 2024. I'm trying to work out what happened to the economy when we went from 1.3% over potential to 1.7% under potential basically in less than 12 months. So four percentage points of what happened.

Adrian Orr:

A big part of what happened is they revised the history before that the most significant changes, the revisions have gone back three years. And so the level of economic activity by the time we got to mid 24 was a lot higher than what the stats department had been feeding US users of statistics suddenly. And that helped explain why inflation domestic inflation pressures were so sticky. So the level went up and then you've seen the actual, the measures got refined and the GDP path that you're looking at now much better fits the mood and the higher frequency data that we were feeling and seeing in the economy. So if you reverse us up in May pre to seeing these revisions, we were really nervous about sticky inflation even though output was supposedly down. What it wasn't.

We were saying we're going to need to hold rates. We think we've got a real inflation expectation problem here. We were receiving a lot of criticism saying, can't you see how hard it is? And then once the high frequency data came in, we took the bet that that was giving us a better signal to get moving and quickly, sure enough, over time the GDP stat now has it. The other parts in there really is some spending didn't disappear, it just got significantly reallocated between sectors. The government consumption path has fundamentally changed, not necessarily in direction but in level a lot of investment that was initially ticked as private sector investment got added back onto government spending and that lifted the whole level of government spending. So not only levels but compositions have changed through that. What's our lesson? The one that we've always followed, look at as many ways of triangulating data to get the best possible here and now feel don't wait for five month old data. It's kind of like buying a reno. It's on the third recall, you get the best one and that's where we're at.

Paul Conway:

But it would be better if at national statistical data was more timely and less prone to revision.

Media:

Just looking at the forecasts and the assumptions with those projections. There's a comment here about government expenditure being still being assumed to decline as a share of the economy, reducing inflationary pressure but to a lesser extent than previously flawed. So what's going on there?

Adrian Orr:

Because that was the investment tail I just spoke about. So we've always had this spending path for a government set of GDP potential declining solely. So it's not adding to the inflation pressure that is still the case, but from a high level what has happened is they've taken investment that was initially ticked under private sector and put it in the government sector. Now that sounds like, oh that's really stupid, that should have been easy. But government's a contracting private sector to do a lot of the investment. It's a very complex trail for statistics New Zealand to work out who's the daddy for this

Paul Conway:

And the forecast there have, we've switched to hifu. So that's a big part of the difference there, but still declining, as you said, as a sharer of the economy.

Media:

Just a broad question to the governor, are you happy with stats nz? Would you like them to do better with things like monthly jobs? Monthly CPI and GDP?

Adrian Orr:

Oh, I'm very proud of what statistics New Zealand, other than what's been in the press all day, the last 48 hours, what they achieve with what they have. We are but one user, we work incredibly closely with statistics New Zealand, very right, very smart, but an almost impossible prioritisation task. They have to achieve what they are asked to achieve with what they get. So as exciting as shifting from quarterly to monthly, CPI may be for monetary policy, it's sitting on their long list of things to do what the things we would most like to see is not necessarily even monthly. CPI, it's a lot of our basic indices updated reweighted hedonic pricing a computer is worth $2,000 a year ago than what it is today, but what you get today for $2,000 is fundamentally different. These are the ways that statistics need to be updated. So we are constantly working with them at no point saying the beatings will continue until their morale improves. They need support. Would you like

Media:

Them to be better funded? Would it help you and them?

Media:

Yes, Giles Beckford Radio New Zealand. If the OCR neutral rate is around 3% broadly judging by your forecast track, is it then a case that your strategy is all things being equal and all orbits of wood being touched, that the cash rate would stay around that level for a prolonged period?

Adrian Orr:

That would be a beautiful world and the world of no future shocks, GDP nominal GDP growth would be running broadly at potential interest rates would be broadly neutral and the exchange rate would be broadly fair value. That's not too far from what this projection is. By the end of this calendar year, all other things unchanged. So it is period and it will better highlight, well what are the monetary policy is neutral on its impact on economic growth in the long term other than keeping things stable. It will much better highlight the need for the real side of the economy, the productivity, the investment, the innovation, all of that stuff to shine through rather than the volatility of or cyclical volatility of monetary policy.

Media:

Yes. Do either yourself or Paul have a view on what has been identified as be noir of the economy, which is low productivity growth

Adrian Orr:

That is the anchor or the bracelet around our ankle of the New Zealand economy? As long as we have a productivity growth as low as it is, then that means in an absolute terms we not growing and in a per capita or relative to global economies, we are feeling sad. So it's about long-term real growth, which is productivity and innovation.

Media:

So how does monetary policy respond to that?

Adrian Orr:

We do the same job, but we're doing it around a much slower growing economy rather than around a higher growing economy. The most stark example at the moment as easy would be say the United States and us both have an inflation problem. Both have been lowering their interest rates to below neutral to slow their economies, but their potential growth rate is up here. Ours was here to slow our economy, we had to take it to zero to slow their economy, they took it to 2% because the difference is productivity. So same task but around different levels of potential economic growth. It's kind of like driving the Humber or the Ferrari.

Paul Conway:

It's a speed limit on the economy. And just your first question, Giles, it's important to think of neutral as a band, a relatively uncertain band. And yes, that band has a midpoint, but as we get sort of closer to the band and within the band, it's really more about feeling our way than being really definitive about where neutral is or isn't.

Adrian Orr:

I need to update my vehicle examples. Sorry,

Media:

I guess a somewhat related question. I see that you're forecasting a further drop in business investment after a significant drop in the September quarter. I mean, are we just seeing a lag play out there or do you have any concern that there might be some darker phenomenon and I

Adrian Orr:

Suppose so in the near term it's the lag that you're talking about and we've got a little bit of an overlay in the next couple of quarters related to that global uncertainty. So we've got good indicators and strong confidence that it will pick up the PMI, the PSI, these short-term measures of activity and all of a lot of high frequency data saying investment will pick up, but it takes a lot of certainty to go and invest in a plant or a farm or whatever. So it's always a little bit of a lag there.

Media:

Okay, and just a basic question just for clarity, I guess. I mean are you actually seeing a tangible concrete turnaround in the economy now as yet?

Adrian Orr:

Yes. So that's why we have the 0.3 for the GDP quarter, we've come through and a 0.6 for the one we're sitting here and a lot of it is just coming through that high frequency data. We won't get GDP for those figures for.

Media:

Okay. What sort of metrics is it that you're looking at in that?

Paul Conway:

Yeah, sure. There's a bunch of high frequency data. I think we've written about it actually in past NPSs. The PMI, the manufacturing index is important. The services index is important. We've got good measures of spending in the economy, expectations around various factors. So there's a broad range of high frequency data, which we actually use to now cast where our GDP predictions are for the very near term and there's uncertainty around all of that. But we are seeing a pickup in that data, which is reassuring

Adrian Orr:

Time for two more questions. That's not to say people are feeling fantastic. It's going back to that price level story rather than rates of growth and the growth rates we are talking about still only around that low potential growth rate, the two and a half percent per annum type economic growth.

Media:

Lucy from Reuters, again, if the New Zealand dollar continues to slide, is that a concern for inflation or are the benefits from higher prices for farmers kind of offsetting any concerns you have

Adrian Orr:

There? Yes, so for us, this country has chosen to choose an inflation rates through the inflation target and to do that it means that we have to use the interest rate. The residual will always be the exchange rate. You can't control all three. So that's what we have to remember. Some countries choose other ones, they choose a fixed exchange rate and then have variable interest rates. For us, we just have to play the game as we see it for the exchange rate, it can impact near term prices. The price of imports can be impacted up or down depending on the role of the exchange rate. But that's near term, that's not longer term inflation. So we'll just have to see where it goes at the moment. Given our terms of trade meat and dairy in particular and an exchange rate around fair value, it's been a very welcome positive income impulse into the country and we expect that to be pretty supported throughout the course of the share because of the things that are holding those prices

Media:

Up. Box B is

Adrian Orr:

Even better than A.

Media:

Must see TV and particularly the analytical note which is forthcoming on the sensitivity of nont tradables inflation to monetary policy. The less sensitive bucket includes things like rates administered prices. How much of a concern is it for you that these administered prices mostly by governments and local government are now contributing a really good chunk? I see nearly one and a half percent percentage points per quarter to inflation.

Adrian Orr:

I'm really pleased you bring that up. I mean one of the great benefits of low inflation is kind of like the tide going out. You can see now what's driving some of these things. The tide has gone out and what has left there really are these administrative prices, are they worrying us? It is just a fact of life we have to live with. In the near term, these things are happening. If they create generalised inflation, then that would mean you'd have to have higher than otherwise interest rates and lower than otherwise inflation in other parts of the economy to achieve it. One assumes that won't happen because that would mean you've got no one to rate over time. So it's in the near term it's happening. There's a lot of catch up investment, but in a low inflation environment they're going to stick out.

Media:

Just finally on the DTIs and lending growth through this year, do you have any views on whether the DTIs kicking in this year, which mortgage brokers are reporting is happening now will constrain the economy's growth?

Adrian Orr:

Yeah, we're very, very pleased to have got the DTIs implemented, implemented during a period when they were non-binding and then that gives us the comfort that there's some seat built on with plenty of room to move and play in the backseat, but you're not going to go flying through the windscreen like the last housing price cycle on the way through. It will act as a good moderation for lending behaviours. Banks have always done it, but at the peak of frothiness, banks get a little bit loose on it and that is a big part of the debt issue and the negative equity issue that we've seen from the last lending cycle. They're indifferent to the level of interest rates. It's this excitement, the important part as well. It's further buffered by the loan to value ratio, so probability of getting into trouble and the cost of if you're in trouble will both be significantly lowered. No one will like us though.

Media:

Hi Dan, from interest again, if I can take us out, just looking at the very long-term view, I think your track terminates at 3.1% or something. Economists are quite interested in that, asking whether that is a signal of a higher probability of going to 360% chance of cutting all the way to three or is that a signal that perhaps you are reluctant to go below that level unless you really have to, if you can just tack on a little extra. Do you plan to keep moving in 50 basis point moves even though your track suggests maybe 25?

Adrian Orr:

I would like to think that if these predictions pan out as it is, once we get down around that level, we're broadly at neutral and inflation's at target and we're not having to do much at all to the level of the official cash rate. Of course we'll be laser-like focused even over the summer periods, but it's one where you're back into a more stable inflation and stable interest rate environment. That's just simply the outcome of the modelling framework. It says, Hey, you are there.

Cool. Alright. Thank you very, very much everyone for your interest in the boxes, the forthcoming information. And I also do just want to say, coming in March 6 and 7, the Reserve Bank is hosting an International Economic Conference. It will be live streamed, it will be it have 2 days of cut and thrust excitement for you Bernard. We've got some significant international global experts coming with us. Ben Bernanke, Professor Ben Bernanke, sorry, Ben will be here with us for the two days. We've got lots of stars including very, very smart people from

Paul Conway:

And Catherine Mann is coming as well. MPC member at the BOE. Very, very accomplished international economist.

Adrian Orr:

Killed it.

Paul Conway:

Thank you.

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.

 

Adrian Orr: Well kia orana tatou katoa toa, Tēnā koutou katoa. Thank you everyone for being here at Te Pūtea Matua, the Reserve Bank of New Zealand. And I'm Adrian Orr, the governor and chair of the Monetary Policy Committee. I'm here with Karen Silk and Paul Conway. Also members of the Monetary Policy Committee and the rest of the committee are here with us in the room today. So So thank you and thank you staff for all of the work in what I will always and for advertise is a great read. The monetary policy statement, it is full of rich information. The projections are, ours are of the committee and I encourage everyone to read it is a wonderful public good today. The monetary policy committee agreed to ease the level of monetary policy restraint in New Zealand and that was by reducing the official cash rate to 5.25%. The committee also agreed that the pace of further easing will depend on its confidence that pricing behaviours remain consistent with a low inflation environment and that inflation expectations are ranked around the 2% target.

Our recent announcements have talked about the committee's growing confidence that rising spare capacity in the economy and changing price setting behaviours would reduce inflation and enable a future easing and monetary conditions. And it is here today that I can say this confidence has now reached that point where the committee has been able to act. Our economic projections are our best estimates of the future path of monetary policy and they're always conditional on the available data. This is why we are back every six weeks also talking about our monetary policy outlook and talking to this outlook. Economic growth remains below trend and inflation is declining across advanced economies. Some central banks have already begun reducing policy interest rates and imported inflation into New Zealand has declined to be more consistent with the pre pandemic levels. Here in New Zealand, annual consumer price inflation is sustainably returning to within the committee's one to 3% target band. It is so pleasing to be able to make that statement on behalf of the committee surveyed. Inflation expectations, firms pricing, behaviour, headline inflation and a variety of core inflation measures are all moving consistent with low and stable inflation. Yes, services inflation remains elevated but this is also to decline both at home and abroad. In line with the increased spare economic capacity. The committee is in a confident position to sustainably achieve our inflation remit and we will continue to act as the data revolves. That ends my statement and we are open for questions. Thank you

Media questions

Media:

Kia ora. Governor, Katie Bradford from One News. How much of a line call was today's decision? How hard was it and did you really feel the pressure given the tough stories we're hearing out there?

Adrian Orr:

I kind of used words like relief and pleased kind of almost border around emotional words that we are at a position where we are confident that inflation is back within its target band and that we can continue now commence our renormalization of policy interest rates. So in that sense it was not a difficult decision and it was full consensus. It's been about building the committee's confidence to get moving and we're at that point now

Media:

How worried are you about the economic situation over the next few months? Are things going to get worse before they get better because obviously it will take some time for this to make its way through the economy.

Adrian Orr:

Yes, I mean our economic activity, it's kind of interesting actually the darkest period is actually where we are right now. We are still waiting to hear our June GDP quarterly growth rate. That's months back and we're in the middle of the September quarter. We have a minus 0.5 and a minus 0.2 growth rate for those two quarters, meaning there is significant spare capacity developed in the economy but our projections from there on forward actually see New Zealand returning to a circa 3% growth rate 25 and 26. So economic activity ren normalising as interest rates come back down and the inflation pressure taking out. So it's darkest before Dawn and I'm suggesting it is, we're basically in dawn at the moment according to our projections.

Media:

Jana Tib from the Herald. Did the committee consider cutting by 50 basis points given the low economic growth or lack of growth?

Adrian Orr:

Yes, we always test ourselves hard on a range of what is the decision and then what are the chances. Either way, I have to say the consensus was for 25 basis points. It's because we have a series of further visits between now and the end of the year, October and the November monetary policy statements and we're really keen to see the actual CPI inflation data and things evolve. So going from 5.50 to 5.25 is a strong start, but it's a reasonably low risk start for the committee.

Media:

And just rewinding back to May, was the reserve bank wrong or bluffing or a bit of both?

Adrian Orr:

No, we weren't buffing, bluffing, buffing. The forecast were well buffed and but not bluffed where we always put out our best foot forward for where we see the rates going. Back in May, where were we five, six months ago, we still had headline CPI inflation north of 4%. We had inflation expectations away from the midpoint of the target. We had services inflation very high and we only had that spare capacity starting to emerge. We talked about the risks both in May and July that those near term pricing intention risks could well be oped by stronger than anticip, a sharper than anticipated decline in activity. And that's what we talked about in July that started to play out and in July we opened the door to say we are getting more confident to start moving rates to a lower

Media:

I mean I appreciate it's a very dynamic environment, but what do you say to people sitting at home watching these press conferences or reading the paper, watching TV when the reserve bank says this is likely what's going to happen to interest rates and then we have something so drastically different?

Adrian Orr:

So what I would always remind them to do is you don't have to wait for third parties to tell you what to think. You can go direct to the Reserve Bank's monetary policy statement and when you read that, you'll read in particular the record of the meeting which talks about the risks and the conditionality of Ford forecasts and those risks were very strongly highlighted in May and again in July. And this is just the nature of turning points. So that's it. By the way, I think more people have voted with their feet and financial markets have been shifting anyway. I mean we are seeing the tenor of mortgage borrowing, having shortened up considerably ie people were sniffing a lower interest rate environment in the future.

Media:

Ruth from Goodeturns and just the business you left your quarterly OCR forecasts unchanged through 25 and 26, but the sorry that was CPI forecasts, they're all unchanged through those two years. And yet you've moved the OCR forecasts by as much as a percentage point or so. Yeah,

Adrian Orr:

No, that's correct. So we're always, the inflation stays, reaches to and remains at two because we are altering monetary conditions. So our inflation forecast is conditional on monetary policy.

Media:

But that's a huge change. I mean it begs some sort of explanation.

Adrian Orr:

Well it does. There's a 42 page explanation here and I invite people to read it and no, it's not a huge change. A change of where you have what 150 basis points. I mean we're not even back at neutral in this forecast period. So I strongly suggest it's not huge. It is a gradual normalisation, a gradual tempering of inflation. Can we move on please? You need to understand the endogeneity of the forecast. I'm

Media:

Today got something like three or four questions. I've only had a chance to ask one.

Adrian Orr:

Sorry,

Media:

Can I ask about the unemployment projections? Yep. You've got it slightly higher than previous, I think peaking at 5.4. How confident are you that it's only going to get to 5.4

Adrian Orr:

Bans of uncertainty around that? A lot of the reason why our projected unemployment rate is higher than when we last published a projection is because of where we currently are. Economic output has declined much more rapidly for reasons that we elaborate on in the document. So we're seeing a slightly higher peak to the unemployment. I do say that the quicker pricing expectations, pricing behaviours change the less need for rising unemployment to achieve the monetary policy we want. That is an important message to price setters.

Media:

Afternoon. Governor Jason from Newstalk ZB. Just wanting to ask about the level of pressure, particularly from your friends across the road. We've had various different examples of associate finance ministers either indicating that you should cut the rate or outright explicitly saying that you should be cutting rates to provide relief for New Zealanders. How much pressure did you feel from lawmakers and did that factor into your decision at all?

Adrian Orr:

Great question and I'm really pleased to say, and I know that the monetary policy committee would agree, no pressure, no pressure. We focus on our task, the remit is given to us and we have to put our best foot forward to achieve that remit. So I think it's a wonderful strength of the reserve banks independence that politicians and other people can talk about what they should do or what would love to do because it's not impacting the actual decisions that we need to make.

Media:

And just very briefly to follow up, Chris Luxon has tweeted mortgage rates relief is on the way because we have delivered lower inflation, the we being the government. So I'm wondering if you could speak to the level of the government's role in today's OCI reduction?

Adrian Orr:

Yeah, so I certainly can't speak to what the prime minister is saying and I'm not aware of that. I would kind of cheekily say success will always have a thousand fathers. So I don't mind who wants to put their name to succeeding too low and stable inflation as long as we get that the fiscal policy story is, it's given one of the special topics and long story short, it comes out about neutral. The most recent budget on monetary policy decisions clamped down on government standing contractionary tax cuts expansionary net net about neutral for our monetary policy decisions.

Media:

Thanks Governor. Luke Malpas from the Post in November, you said that people out in New Zealand economy needed to cool the jets, which jets have been cooled the most over the past few months.

Adrian Orr:

Consumer spending I would say is down considerably. You think it's down an aggregate but then you divide it per capita, it's down significantly to have such a strong growth and migration and to have declining consumption is doing it tough. That's a cold jet.

Media:

And as another cold jet, you mentioned before more contractionary fiscal policy. I saw that the line in the decision was saying that alongside restrictive monetary policy earlier or larger impact of tighter fiscal policy could be constraining domestic demand. How much data do you have on that at the moment? How much of that is educated guests first, what you're seeing coming through

Adrian Orr:

It's about 50 50 actually. I mean the important part is that the first part, government spending has been well signalled and been underway for quite some time from late last year and on an ongoing basis. So some of the reduction from the government spending side has already occurred, but there is still more ongoing. The challenge for us was we can see that and that's good. We understand that the challenge of course for us is what was going to be the scale scope of the tax cuts and now we say and what are people going to do with 'em in there we talk about these concepts of multipliers and how much people are going to spend from this and we think it's going to be reasonably subdued given the broader economic context. So our working assumptions are in there. I think what are we the spending 0.5 of what they're receiving. Is that the Yep.

Media:

Tom Racker from the Post. A first question for Paul Conway and then maybe a quick one for you Governor Paul, you suggested after the May NPS that a slightly mechanical mechanistic, sorry OCR track may have thrown people off a bit of course in terms of what to expect. Have you made any changes to the OCR track this time and can we rely on it a bit more perhaps than we did in May? And just for you governor sort of keen to get a sense of how important it is that late cuts are reasonably smooth A SB forecasting the signals to sort of steady decline in interest rates. Has that been a factor in the decision to create a smooth downward path?

Paul Conway:

No, we have not made any change into how we think about the OCR track or how we use it to signal the likely path of future monetary policy decisions. And as the Governor mentioned in his opening remarks, the full committee stands behind that track.

Adrian Orr:

And what was your one? I can't remember. What was my one?

Media:

So yeah, the question there was how important it was to have that sort of s smooth track

Adrian Orr:

Down. This really comes down to the conditionality of the forecast. This is why monetary policy is a learning game and it's a repeat game. So as the data comes through, we've been very pleased at the committee that the economy has normalised more post that global hiatus of previous years. So the economy is responding more normally to the monetary policy activity on the way through. What you're seeing in that forward path is us taking a measured approach to reducing the monetary restraint, getting back to neutral on the way through. The good news is, well, we'll even be learning as we go through that around actual data which has been crazily volatile over recent years. So that's the main part.

Media:

Kiaora, Governor. Anan Zaki from Radio New Zealand. Can households be hopeful that we can return to an era of low interest rates that we saw leading up to the Covid pandemic and then of course at the start of the pandemic for other reasons. But can we, is the era of low interest rates going to come back

Adrian Orr:

As long as inflation remains low and stable, you'll have low and stable nominal interest rates. And so with that, I think this our rejection is saying we are going back into a period of low and stable inflation subject to any other external shock. And that means that you will see lower nominal interest rates coming back into the economy. So that's the case. We haven't quite started worrying about having negative interest rates yet remember those stories, but we are far more confident that our neutral rate is around a 3% official cash rate levels. So if you think about that as being neutral on average we are heading back to that

Media:

Governor, it's Ben McKay here from Australian Associated Press. The growth forecasts have been revised a long way down for this current year, quarter two and quarter three now in predicting another recession. So the double dip becomes a triple treat. Can you say what's behind that and if the goal of monetary policy in this situation is for a soft landing, can you say you've actually delivered that?

Adrian Orr:

So what's behind it? Monetary policy has been tight and has been restraining growth. That is a significant part. There are other drivers of economic activity as well, the government's spending decisions and on top of that you've had net migration from extremely strong from zero to extremely strong back to something below average. So there are significant drivers of near term economic activity. Most of the change in our forecasts are not really about our projections, it's about the here and now. The starting points, and this is where we've taken a lot of comfort from the broad range of near term indicators that are consistently soft and in some cases exceptionally soft. So rather than waiting for a June GDP figure or a September CPI, we are taking on board high frequency data that is consistent across the board of weaker activity. So that's the story. And I dunno how to answer your other question really.

Media:

Governor Bernard Hickey here from the The kaka and The Spinoff, I really enjoyed Box B. I'd give it five stars. I think if I had to review it in here it says the updated assumptions mean that fiscal policy added slightly to medium term inflationary pressures. Could you have cut earlier and more if there had not been tax cuts adding to inflation?

Adrian Orr:

I don't get involved in the hypotheticals. I think a really critical, important part of May and of July is the near term starting point for actual CPI core headline and inflation expectations and pricing intentions we're still inconsistent with us achieving our target.

Media:

And in the section about inflation, it mentions that administered inflation has also been high. Could the government have done more to avoid that administered inflation help you out?

Adrian Orr:

I'm not so sure about the core government. There is a combination of prices that are just indexed prices that have tariffs, taxes, there are regulated prices that are only reset once a year, local authority rates, et cetera. And then there are other administrative prices like insurance, et cetera that are shifting with the economic winds, et cetera. So it's quite a broad church of administered prices. Our concern there was when you're at high inflation, which we no longer, when you have heightened inflation expectations, the longer these one-off events keep actual inflation up, the harder it is to win the inflation battle. And so in fact, Mr. Conway, your speech in June, do you want to quickly talk to that?

Paul Conway:

Yeah, so in June I talked about around the risks around the May projection, but also about in terms of services inflation, non tradables inflation. We split it into three categories for services that the prices respond very quickly to monetary policy and then a second one where it's more moderate and then a third category where we don't see much change in prices there in response to monetary policy. And what we've seen since then is not only is that sort of high frequency prices coming off or continuing to come off, but also that second category of more persistent prices in the economy are starting to fall currently. Which again gives the committee confidence that we're going to achieve our objective, but there'll always be that sort of hardcore prices that don't respond to monetary policy for other reasons. The relative price shifts in the economy,

Adrian Orr:

A really interesting one that we chatted about and feel more comfortable with managing if we're actually in a low inflation environment, are the announced changes to electricity prices next year and then the following year will signal well understood but significant and widespread. And so again, you're more confident about a look through that if you have well anchored inflation expectations.

Media:

Just finally on that electricity, it may be a bit late for your forecasts, but how much impact do you think there might be both on inflation and on output from the spike in wholesale electricity prices and the closure of various plants?

Adrian Orr:

We haven't taken any time looking at that. What I'm referring to were the announced price rate changes

Paul Conway:

From the Commerce Commission,

Adrian Orr:

Commerce commission

Paul Conway:

That they announced those price changes are in our CPI track. Yeah,

Adrian Orr:

That's where you'll see some excitement around the two where it goes two point something and then back again. And really it's these lumpy bits feeding through that we know about in the future.

Paul Conway:

Yeah, because inflation expectations are well anchored now we can have a relative price shift like that and it doesn't threaten inflation being at target. It passes through.

Adrian Orr:

Cool.

Media:

And Lucy from Reuters, if inflation is back in the band this quarter, which is what you're forecasting real rates are going up even with this cut, could we see more aggressive cutting in the coming months?

Adrian Orr:

Yeah, I mean that's spot on. I dunno about more aggressive. It's going to be data dependent without doubt, but you're right, it is a reasonably safe first step of the monetary easing. We've seen some loosening overall in monetary conditions where moving forward with the OCR, an enormous amount of fraud is already priced into the markets. So we're in a strong position to move calmly I would say.

Media:

You talk about domestic inflation in the statement and it's obviously been stickier than broader inflation. Are you hoping that it gets back to the target like a one to 3%? Do you have a sort of idea on how quickly you would like to see that? What are the problems there?

Adrian Orr:

And so in our projections we do outline headline CPI and then we split these into these amorphous things, tradable the non tradable, non tradable, largely the homegrown consumer side. And that is still north of 3%, but all of our indicators and measures have it declining. Some measures are actually below 3% now of domestic inflation by the end of the forecast, that is still the bigger part of the total CPI inflation. I think we have non tradables inflation at three and a half and tradables inflation or one and a half or something there or thereabouts. It adds up to us being bang on target and we're happy. And

Media:

May you were projecting a cut next year, first cuts next year. Now we're looking at a cut today. What went wrong? Is this a mistake that you made in May? What happened?

Adrian Orr:

I think we explained it extremely well here and I would hope that you read it because it's the first two paragraphs of the document that talk to exactly what we were talking about in May with the risks around how we alter that in July and how it has now enabled us to act in August. So these are just very standard turning points in an economy. People please understand the conditionality of economic forecasts. You need to get that across to your listeners,

Media:

But aren't many of the economic forecasts that you made in may, quite similar to where they came in over the last few months?

Adrian Orr:

We've been remarkably pleased with for the last two years of how the economy has broadly panned out. In fact, remarkably pound out how we have been anticipating, if we go back to Rebecca puts, was it November 22? November 22, we were talking about an economy that looks almost exactly where we're sitting today.

Karen Silk:

The governor, as he said earlier, yes, you're right. Those New Zealand statistics numbers did come out as we anticipated. They would be a may. They lagged. They're talking about historic situation. What we've had the benefit of between May and now is increasing evidence from high frequency indicators that the economy's weakening

Adrian Orr:
The price in pensions

Karen Silk:
And they were the risks that were called out in May. They've begun to evolve in July and we feel a lot more confident now and that's why we're able to now cut interest rates.

Media:
Hi Dan Brunskill from interest.co nz. I don't want to dwell on this too long, but the change in policy is huge. It's almost an entire year early, the cuts and you're doing that solely on what people call second tier data. Previously you've signalled that you need to see actual hard numbers and non tradable inflation and core inflation and now you're seeming quite happy to move on

Adrian Orr:
Indicators may, we didn't have a CPI at 3.3%. We didn't have core inflation declining and all indicators of core inflation declining. We didn't have inflation expectations anchored at the target rate and we didn't have price setting behaviour consistent with low and stable inflation. We now have all of those. So that is a material shift in the confidence the committee has that monetary policy is working for us to have talked about. A cut back then would've us being negligent to our role of what we're trying to achieve. The projection line was a line that said we think we're going to have to be on hold for some period of time. There are risks near term to the upside around inflation expectations. There are risks in the medium term to the downside to economic growth. We are now fast forwarded into that period and the risks are now more balanced. So

Media:
Would it be fair to say, because you've said previously that the risks were balanced, is it fair to say that the downside risk scenario is the one that is emerging?

Adrian Orr:
No, because we targeting inflation and inflation is coming back sustainably into the target range. So I don't see that as a downside risk. I see that as monetary policy succeeding. If we can keep that there around this period then fantastic.

Media:
Sorry if my question was unclear, I was saying previously you said we'll hold rates out until late next year, but we see up and downside risks to that forecast. Now you're saying we're cut much sooner, so presumably we're on, we're calling it the downside risk as in lower

Adrian Orr:
Inflexion. It's a good downside. What we're saying is that the near term growth weakness is here. And at the same time those concerns around pricing intention and expectations have dissipated and actual inflation has declined. We're talking about an inflation rate in our central projection of 2.3% I think for the September quarter. What a degree of confidence. That type of number gives a central bank relative to what we were talking four point something in May where we were, sorry, always looking three. Three. Well we've got to 3.3, but we were, yeah. And so it is a good news story of pricing behaviours changing rapidly.

Media:
And just last question, it wouldn't be interest.co if we didn't ask house prices. Do you think that this decision could send them up quickly and what risk does that pose to inflation?

Adrian Orr:
Yes. Well, we don't have a house price inflation target, so we've focused purely on consumer price inflation. We worry about house prices to the extent it impacts on consumer price inflation. Our running assumption through this document is that they remain pretty flat through the period. So

Media:
Hi again. My question basically coming off what Dan said is about house prices, how worried are you then about people getting a bit trigger happy, getting a bit excited now they're seeing rates going down and the housing market going up quite quickly. We're already anecdotally hearing that interest is picking up

Adrian Orr:
A bit. I can't give any of my emotions to them. Just be smart. Just think back, no, what two years ago

Media:
Do you think this will help?

Karen Silk:
Look, I would say we're in an extremely low credit growth environment and you've got banks still making assessments around people's capacity to service debt at levels that are substantially higher than current mortgage rates. That's not going to change in a hurry. So people are still in a position where they need to be able to demonstrate debt serviceability in order to be able to take on additional debt. So whilst we've got a cut in interest rates here today, and we've had some almost immediate response come out of some of the banks in terms of reducing mortgage rates, we are still in a very restrictive and very confident that we are in a, we've got restrictive financial conditions there. So you need to keep that in mind when you're thinking about things like house prices

Adrian Orr:
And I think important as well to your viewers, the Ford path for interest rates are actually even lower than our Ford path for the OCR. So that has already been in the market, which is why you're seeing such a muted market response to this activity.

Media:
And I guess on the flip side, how worried or what's the data saying about the increasing number of mortgage sales and business liquidations and so forth And that trend might continue for some time

Adrian Orr:
Yet. Yeah, no, we expect that trend to continue the financial stresses lag economic activity. And so that's what we look at in our financial stability reports, in our assessments. We have a projected non-performing loans to still increase from where they are, but to remain at reasonably low historical levels. Nothing that threatens the financial stability of the country, but certainly puts financial stress on some households.

Media:
Luke Mel pass from the post. Are you travelling to Jackson Hole next week, governor?

Adrian Orr:
No.

Media:
Okay. I noticed some comments from the Bank of England governor Andrew Bailey a couple of weeks ago, and he said that he's not giving any view on a forward path of interest rates, basically saying meeting by meeting, we take the data as it comes. I mean, do you think that we're, as a kind of a more macro trend, is that more the world that you think that we're you are in now? Central bankers?

Adrian Orr:
No, no. I think central bankers that provide forward paths, wish they didn't. Those that don't wish they did, there is no known practise. We've had a long standing practise here of putting our best foot forward out subject to people understanding the conditionality. When the facts change, the decisions change and that's what we are working through always. That has worked very well for us. I've heard central banks who do scenarios, which they didn't do scenarios because everyone focuses on that one scenario. So it's courses for courses. I think the Bank of England most recently bitten by a review that said you need to have an endogenous path or something. So everyone's doing things slightly different.

Media:
Hello again, last question. Apologies for the simplistic nature of the question, but I was just wondering if maybe you could help me understand that on one side we've got interest rates from the bank, as you said, coming down and also we've got the government providing tax relief as well. Both of those traditionally would be inflationary. However, the reserve banks suggesting that inflation is going to hit that to get close to that midpoint. I'm just wondering how to square that circle.

Adrian Orr:
Well for a start, monetary policy is still restrictive. It's just less restrictive. So that helps the government spending is also restrictive and declining. So that in large part offsets the tax cuts, which may add to spending. Meanwhile, with rising unemployment and slow credit growth, business growth, it's a quiet environment. Spare capacity has opened up in the economy and it means we can grow without driving inflation as we chew up into that spare capacity. Does it help?

Media:
It does indeed. And just as you leave today's press conference and finish with your meeting, do you feel any sense of a relief of pressure now that you've finally pulled the trigger on an OCR cut?

Adrian Orr:
Yes.

Media:
Why is that?

Adrian Orr:
Because it means inflation is going back to where it's meant to be inside one to 3%. So does it mean we will be any less vigilant? No. So of course it is painful. Inflation is no one's friend and we are getting rid of it, so that has to be a good thing. Thank you very much, team. All the very best. Before you go, I'm a terrible marketer. First of all, I'll just repeat, please read especially the record of the meeting that captured a lot of the uncertainty. And also I'm keen to share that Te Pūtea Matua, we are going to be hosting the monetary policy challenge for all secondary schools at the end of this month. That challenge is going to kick off with the public webinar, which of course the public is invited to where you will hear people discuss the monetary policy statement. Some of our wise economists here, some of them will even share what it's like to work here to encourage excitement amongst the schools to be central bankers. How am I doing on my pitch? Tune in Wednesday 28 August 11:00 AM for one hour. Be wowed and tell all of your secondary schools, get involved. Get online, as Tina would say, the internet, it's everywhere. And join in on the monetary policy challenge. Kia ora.