Restrictive monetary policy has significantly reduced consumer price inflation, with the Committee expecting headline inflation to return to within the 1 to 3 percent target range in the second half of this year.
The decline in inflation reflects receding domestic pricing pressures, as well as lower inflation for goods and services imported into New Zealand. Labour market pressures have eased, reflecting cautious hiring decisions by firms and an increased supply of labour. The level of economic activity, including business and consumer investment spending and investment intentions, is consistent with the restrictive monetary stance.
Current and expected government spending will restrain overall spending in the economy. However, the positive impact of the pending tax cuts on private spending is less certain.
Some domestically generated price pressures remain strong. But there are signs inflation persistence will ease in line with the fall in capacity pressures and business pricing intentions.
The Committee agreed that monetary policy will need to remain restrictive. The extent of this restraint will be tempered over time consistent with the expected decline in inflation pressures.
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Summary Record of Meeting
The Monetary Policy Committee discussed recent developments in the domestic and global economies and the implications for monetary policy in New Zealand.
Global economic growth remains below trend and is expected to pick up only gradually over the next year. The economic outlook varies among New Zealand’s trading partners, with economic growth in the United States remaining stronger than in many other advanced economies. Meanwhile, economic growth in China is forecast to be subdued relative to recent norms.
Global consumer price inflation has been trending down. This has given some central banks the confidence to either start, or to signal, a gradual reduction in policy interest rates. Nevertheless, monetary policy remains at restrictive levels in most advanced economies, and the recent stalling in global disinflation has tempered market expectations of the speed of official rate reductions.
The Committee noted that global equity prices continue to reflect expectations of a smooth disinflation process. Members discussed risks to this ‘smooth landing’ scenario, noting market pricing of risk could increase materially if these expectations are not met.
The Committee agreed that New Zealand’s restrictive monetary policy is reducing domestic demand and consumer price inflation. The Committee is confident that inflation will return to within its 1-3 percent target range over the second half of 2024.
Members agreed that there is now more evidence of excess productive capacity emerging, with measures of capacity utilisation and difficulty finding labour easing materially. The Committee noted that recent higher frequency indicators suggest that near-term growth in business activity has weakened. A range of business and consumer surveys, and higher frequency spending and credit data, all point to declining activity. Members discussed the risk that this may indicate that tight monetary policy is feeding through to domestic demand more strongly than expected.
The Committee discussed signs of easing in the labour market. Recent survey measures of hiring intentions and job vacancies indicate flat employment levels. Net migration has also fallen in recent months to levels consistent with the pre-COVID period.
Members discussed recent changes to financial conditions in New Zealand. Non-performing bank loans and corporate insolvencies have increased from low levels in line with declining economic activity. These metrics are slow moving, and hence measures of financial stress are expected to keep rising. Bank credit growth also remains very subdued, in line with weakness in the domestic economy and low business and consumer confidence. Bank funding costs are expected to remain elevated as funding sources revert to higher cost wholesale and deposit funding. Elevated funding costs in turn are expected to underpin lending rates over the medium term.
The Committee discussed the impact of fiscal policy as announced in the Government’s Budget 2024. Government expenditure is forecast to decline as a share of the economy in coming years. Members noted timing differences between the impact of lower government spending and tax policy changes. Lower government spending has already been contributing to weaker demand and will continue to do so. However, the positive impact of tax cuts on private spending is yet to occur and is more uncertain.
Members discussed progress towards achieving their inflation objective. Recent monthly Selected Price Indexes suggest weakening in some of the more volatile inflation components, while survey measures of cost pressures and pricing intentions have continued to decline. Headline inflation is expected to return to within the 1 to 3 percent target range in the second half of this year. Domestic inflation measures remain more persistent, but growing excess capacity in the domestic economy provides greater certainty that they will sustainably decline.
The Committee discussed the balance of risks to the inflation outlook. Members noted a risk that domestically driven inflation could be more persistent in the near term. However, there is also a risk that price setting behaviour and inflation expectations could normalise more rapidly as headline inflation declines.
Members discussed risks to the economic outlook stemming from Government policy. They discussed the challenge of delivering fiscal consolidation. In addition, some members noted that Government regulatory reforms may affect pricing behaviour in several sectors and the productive capacity of the economy. The net impact of these policies remains uncertain.
The appropriate stance of monetary policy was discussed. The Committee agreed that monetary policy will need to remain restrictive. The extent of this restraint will be tempered over time consistent with the expected decline in inflation pressures.
On Wednesday 10 July, the Committee reached a consensus to maintain the Official Cash Rate at 5.50 percent.
Attendees
MPC members: Adrian Orr (Chair), Bob Buckle, Carl Hansen, Christian Hawkesby, Karen Silk, Prasanna Gai.
Treasury Observer: Tim Ng.
MPC Secretary: Chris Bloor.
