RB outlook positive with some caveats

The outlook for New Zealand’s economic growth remains positive, albeit with considerable uncertainty remaining, especially internationally, the Reserve Bank says in its 2017-2020 Statement of Intent.

“We are working to deepen the bank’s understanding of the evolving conditions affecting the New Zealand economy and their implications for monetary policy,” said governor Graeme Wheeler. Earlier this month the central bank kept rates on hold at 1.75 per cent and reiterated that monetary policy will remain accommodative for a considerable period.

The bank noted the outlook for global economic growth has improved and become more broadbased over the past six months and stronger global demand has helped to raise commodity prices over the past year, leading to some increase in headline inflation among New Zealand’s trading partners.

New Zealand’s economy grew a little over 3 per cent during 2016, which is above the average pace of expansion over the past three decades, it said. The expansion has been supported by accommodative monetary policy, strong population growth, and high levels of household spending and construction activity. It noted the trade-weighted exchange rate has fallen since early 2017, which, if sustained, will help to rebalance growth towards the tradeable sector.

Regarding domestic inflation, the central bank said there could be variability in headline inflation over the year ahead but non-tradeables and wage inflation remain moderate, while being expected to increase gradually. “This will bring future headline inflation to the midpoint of the target band over the medium term. Longer-term inflation expectations remain well-anchored, at around 2 per cent,” it said.

The bank reiterated a key domestic risk continues to be the performance of the housing market. Mortgage interest rates remain low and the rate of house building is insufficient to accommodate rapid population growth, it said. Given that many households are vulnerable to an increase in interest rates or a decline in income, the central bank is consulting on whether a debt-toincome policy should be included in the set of macro-prudential instruments.