6 takeouts from Orr’s ‘nothing much to say’ analysis

Reserve Bank governor Adrian Orr, at today’s monetary policy announcement release.

Reserve Bank governor Adrian Orr’s unsurprising announcement today that the official cashrate would stay at 1.75% told me this:

  • The NZ economy is weak
  • Downturns elsewhere in the world could weaken it further
  • Costs might still increase
  • Businesses could speed the rise in inflation by passing on costs quickly
  • The Reserve Bank needs inflation to get up to 2% to show the bank’s performing properly, and
  • Government spending on hospitals, housing & transport infrastructure will prop up the internal economy.

Migration & banks’ role not discussed

Mr Orr gave migration a one-liner: “Net immigration continues to ease, slightly reducing aggregate demand.” And he didn’t mention one other powerful force: Commercial banks’ performance, which has the power to raise or lower housing expectations & business intentions.

He did say in the monetary policy statement, on housebuilding: “A range of capacity-related constraints mean that many construction firms cannot expand production enough to keep up with demand. Firms report that labour shortages, credit constraints & a lack of land with suitable infrastructure are limiting further growth in the sector. These constraints are expected to limit residential investment growth in the near term.”

He also mentioned in the policy statement there was a risk of economic slowdown, and therefore the chance the bank would cut its cashrate in support: “There is a risk that economic growth could slow down further over the next year if a global slowdown reduces demand for our products. Should that happen, we could lower interest rates to support employment and ensure inflation remains around 2%.”

Since its November statement, the Reserve Bank has lowered its projection for gdp growth in the medium term, based on a lower growth assumption for potential output. Some of this decline is attributed to the fall in residential investment.

Some of the projection figures:

  • The annual rate of gross domestic product (gdp) growth reached its lowest point in 5 years in the September 2018 quarter – 2.6% versus 2 sharp drops to 1.8% in the first & fourth quarters of 2013.
  • The Reserve Bank projects in its latest monetary policy statement that the gdp growth rate will rise to 3.1% through to the September quarter this year, then ease steadily through to the March 2022 quarter, all the way down to 2.1%.
  • The bank does see gdp growing steadily, in small steps. Assuming gdp (production) of $63.6 billion this quarter (in 2009 money terms), the bank projects growth of $5.1 billion through to the March 2022 quarter – an 8.1% rise over 3 years.
  • It expects New Zealand’s net foreign liabilities to hold at around 53-54% of gdp over the next 3 years. And it expects the labour force participation rate, which was at 65.1% (seasonally adjusted) in 2000 and reached 70% in the September 2016 quarter, to have topped out at 71% in the September quarter just gone and to sit at 70.9% for the rest of its projection period. It expects average hourly earnings to have risen by 2.8% in the December quarter, to rise 3.8% in this quarter, and rises then to sit mostly in the low 3%/year range.
  • The bank & CoreLogic project that CoreLogic’s house price index will continue its decline from a peak increase of 15.1%/year in the December 2016 quarter to a rate around 2%. Since that peak, the index rises were 12.8%/year in the March 2017 quarter, dropping to 6.4%/year in the following quarter, to a projected 3.2% in the December 2018 quarter and to 2.6% this quarter. Looking forward, they see 3 bigger rises in the next 3 quarters this year (4.3%, 4.7% then 4%), then index rises mostly around 1.9-2.1%/year through to 2022.

The release statement:

Apart from the possibility of a cashrate cut to combat a decline in international trade, Mr Orr said he expected the rate to stay at 1.75% through this year & next.

In his media release he commented: “Employment is near its maximum sustainable level. However, core consumer price inflation remains below our 2% target midpoint, necessitating continued supportive monetary policy.

“Trading-partner growth is expected to further moderate in 2019 and global commodity prices have already softened, reducing the tailwind that New Zealand economic activity has benefited from. The risk of a sharper downturn in trading-partner growth has also heightened over recent months.

“Despite the weaker global impetus, we expect low interest rates & government spending to support a pick-up in New Zealand’s gdp growth over 2019. Low interest rates, and continued employment growth, should support household spending & business investment. Government spending on infrastructure & housing also supports domestic demand.

“As capacity pressures build, consumer price inflation is expected to rise to around the midpoint of our target range at 2%.

“There are upside & downside risks to this outlook. A more pronounced global downturn could weigh on domestic demand, but inflation could rise faster if firms pass on cost increases to prices to a greater extent. 

“We will keep the official cashrate at an expansionary level for a considerable period to contribute to maximising sustainable employment, and maintaining low & stable inflation.”

Link: Monetary policy statement

Attribution: Bank release, monetary policy statement.

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