New Zealand consumer prices are now back within the Monetary Policy Target of 1% to 3%. This is due to a decline in headline inflation, the convergence and determination of expectations, firming corporate behavior and a variety of underlying NFs. However, economic growth remains below expectations, with variation across advanced economies. Some banks have begun to cut interest rates, which is adjusting imports to New Zealand and could be more consistent with pre-pandemic levels.
However, inflation remains at a lower level than services, but is expected to decline significantly, both at home and abroad, thanks to increased economic buffers. For this reason, New Zealand consumer prices are expected to decline and Committee agreed to ease the level of monetary policy accommodation by cutting the official cash rate to 5.25%. The pace of further easing will depend on the Committee’s confidence that pricing behavior remains consistent with a low inflation environment and that inflation expectations are anchored around the 2% target.
Minutes of the August 2024 Meeting: At its last meeting, the Monetary Policy Committee reviewed recent economic and financial developments and their implications for monetary policy in New Zealand. The Committee noted that the weakness in domestic economic activity noted in the July Monetary Policy Review had now become more pronounced and widespread.
Headline inflation had declined, and business inflation expectations had returned to around 2% over the medium to long term. Accordingly, Committee members agreed that the time had come to begin easing monetary policy. However, the pace of easing would depend on the extent to which price action continued to accommodate low inflation. Globally, growth remained below trend in most advanced economies. Growth in China was weaker than expected, due to a slump in the housing market and weak consumer demand. Despite strong growth in the US.
Global inflation remains subdued
The Committee noted that global inflation remained subdued but remained elevated in parts of the services sector in many countries. At the same time, some central banks have recently begun to cut interest rates, reflecting low core inflation, weak economic activity and weak labour markets. In this context, the Committee noted that near-term economic activity and inflation indicators in New Zealand now resemble those seen in countries where central banks have begun to cut interest rates.
While official economic statistics have developed in line with expectations in the May Monetary Policy Statement, a wide range of high-frequency indicators point to a significant weakening in domestic economic activity in recent months. These include various survey measures of business activity, electronic card transactions, vehicle movements, home sales, job openings and job vacancies. Together, these indicators provide a consistent signal that the economy has contracted in recent months. The output gap is now estimated to be more negative than assumed in the May Monetary Policy Statement, suggesting increased spare capacity.
The Committee discussed the possible causes of the current economic weakness. In addition to restrictive monetary policy, the earlier or larger impact of tighter fiscal policy may be constraining domestic demand. Lower net migration may also play a role. The Committee noted that measurement challenges, including methodological changes made by Statistics New Zealand in the national accounts, create additional uncertainty about the likely origin and persistence of this weakness. The Committee discussed recent developments in the labor market.
Second-quarter data indicate a slowdown in employment growth, with private sector jobs, hours worked, and wage growth declining. The impact of government spending restraint and public sector job losses is expected to translate into further weakness in employment growth in the coming quarters. In its fiscal policy discussion.
Weaker Global Economic Data
The Committee discussed global and domestic financial conditions, with weaker global economic data leading markets to lower their interest rate expectations for the rest of the year, leading to lower sovereign yields in most advanced economies. Although domestic financial conditions remain tight, they have become more resilient over recent months. Market expectations about the future path of policy rates have contributed to lower wholesale and borrowing prices, as well as some depreciation in the nominal exchange rate.
The Committee also noted that more households are opting for shorter pricing periods, meaning that mortgage rate cuts will reduce household interest costs relatively quickly. The Committee noted that credit remains available, but demand for it is weak, reflecting weak economic activity. High interest rates, slowing housing market activity, and low investment intentions have all contributed to dampening demand for credit. In addition, the agricultural sector’s debt repayments have dampened demand for credit. The Committee also reviewed risks to the financial system.
With debt servicing costs rising and economic conditions weakening, some households and businesses are facing financial stress. However, the Committee noted that banks have tightened lending standards in recent years, increased loan loss provisions, and are well capitalized, which enhances the resilience of the financial system. Although non-performing loans have increased from a year ago, they remain relatively low by historical standards, leaving banks well positioned to support borrowers. In this environment, the Committee agreed that there is no fundamental contradiction between achieving the inflation targets and maintaining financial stability.
The Committee discussed inflation developments. Inflation declined significantly in the second quarter, mostly due to lower inflation in tradable goods, while domestic inflation declined in line with expectations. Members were encouraged that inflation expectations in the surveyed businesses had returned to around 2% over the medium and long-term horizons.
The reasons for inflation departure
The Committee discussed the reasons for inflation departure from the target range and the expected timeframe for inflation to return to the target midpoint of 2%. Members noted the ongoing effects on inflation from demand effects of monetary and fiscal stimulus, pandemic-related supply disruptions, higher commodity prices and shipping costs due to geopolitical tensions.
Based on available information, the Committee considered that the path of the policy rate in the projections reflected its view of the policy strategy that would best achieve its mandate. The Committee noted that the monetary policy setting was consistent with annual consumer price inflation remaining within the target range near the 2 percent midpoint over the forecast horizon.
The Committee noted that the balance of risks had gradually shifted since the May Monetary Policy Statement. With a broad range of indicators pointing to a faster-than-expected contraction in the economy, downside risks to output in July had become more pronounced. Members also expressed concern about avoiding unnecessary near-term instability in output given the evolution of recent indicators.
In discussing the appropriate stance of monetary policy, the Committee noted that recent indicators provided confidence that inflation would return sustainably to the target within a reasonable timeframe. With headline CPI inflation expected to return to the target range in third quarter of September and growing spare capacity expected to support continued low domestic inflation, the Committee agreed that there was scope to ease the scope of monetary policy.
However, members noted that monetary policy would need to remain tight for some time to ensure that domestic inflationary pressures continue to dissipate. The pace of further easing would therefore be conditional on Committee’s confidence that pricing behavior continues to adjust to a low inflation environment and that inflation expectations remain anchored around the 2% target.
