Reserve Bank policy a key driver in economic performance
The Reserve Bank’s monetary policy has been an important driver in the last five years behind above-trend growth in the
economy and employment, Reserve Bank Governor Graeme Wheeler said today in a speech.
Speaking to the Northern Club in Auckland, Mr Wheeler said that the New Zealand economy has generally performed well in
the last five years.
“It’s been a remarkable five years, especially with the challenges thrown up by the global economy and an over-heated
domestic housing market. On the international front we’ve seen increasing use of unconventional monetary policies,
sluggish international trade, sharp swings in commodity prices, a continued rapid build-up in global debt, and
unexpected political developments in Europe, the UK and the US.
“Back home we’ve experienced the strongest migration surge since the 1800s, probably the longest period of negative
tradables inflation since the Great Depression, a 75 percent decline in dairy prices before recovering, a major shift in
resources to the non-tradables sector to support the Canterbury rebuild, and annual national house price inflation
reached 21 percent.”
Despite these challenges, Mr Wheeler said, GDP growth has averaged 2.8 percent and employment growth 2.5 percent. Both
exceed the trend rate of growth for the period of flexible inflation targeting up until 2012. Headline CPI inflation
averaged 1 percent due to 4½ years of negative tradables inflation, while core inflation averaged 1.4 percent.
“Over the past five years, the Bank’s monetary policy has been an important driver behind the rate of output and
employment growth, and the path of non-tradable inflation and inflation expectations. Long-term inflation expectations
remain well anchored at the target mid-point of 2 percent.”
Mr Wheeler said that New Zealand has also had a stable financial system. “LVR restrictions have reduced financial
stability risks as house prices became increasingly stretched. Requiring new borrowers to have a greater equity
contribution in their house purchases reduced the overall riskiness of banks’ mortgage portfolios.
“Nationwide annual house price inflation has declined to 1 percent due to LVR restrictions, the tightening in bank
lending, the rise in mortgage rates and increasing concerns about housing affordability.
“LVRs are not expected to be a permanent measure, but their removal would require a degree of confidence that financial
stability risks won’t deteriorate again. However, debt-to-income ratios have risen in recent years, and with the
underlying drivers of housing demand (population growth, low interest rates) remaining strong and demand outstripping
supply, there’s a risk of a housing market resurgence (and a sharp lift in high LVR lending) if LVRs were removed at
this time.”
Mr Wheeler said that, in the absence of major unanticipated shocks, prospects look promising for continued robust
economic growth in New Zealand over the next two years.
“The greatest risk we face at this stage relates to the inflated global asset prices and the continuing build up in
global debt.
“If growth in the global economy slows, we have some scope to buffer our economy. We’ve greater room for monetary policy
manoeuvre than central banks in many advanced economies. Our official cash rate is 1.75 percent – above the zero and
negative interest rates of several advanced country central banks – and the Bank has not grossed up its balance sheet by
buying domestic assets. With a budget surplus and low net debt relative to GDP, there’s also flexibility on the fiscal
policy side.”
Read the speech: Reflections on the stewardship of the Reserve Bank
ENDS