August Monetary Policy Statement and OCR

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.