Media release
The Monetary Policy Committee today agreed to cut the Official Cash Rate (OCR) to 4.75 percent. The Committee assesses that annual consumer price inflation is within its 1 to 3 percent inflation target range and converging on the 2 percent midpoint.
Economic activity in New Zealand is subdued, in part due to restrictive monetary policy. Business investment and consumer spending have been weak, and employment conditions continue to soften. Low productivity growth is also constraining activity.
Some exporters have benefited from improved export prices. However, global economic growth remains below trend. The outlook for the United States and China is for growth to slow, while geopolitical tensions remain a significant headwind for world economic activity.
The New Zealand economy is now in a position of excess capacity, encouraging price- and wage-setting to adjust to a low-inflation economy. Lower import prices have assisted the disinflation.
The Committee agreed that it is appropriate to cut the OCR by 50 basis points to achieve and maintain low and stable inflation, while seeking to avoid unnecessary instability in output, employment, interest rates, and the exchange rate.
Summary Record of Meeting – October 2024
Members of the Monetary Policy Committee agreed that the stance of monetary policy has been consistent with ensuring low and stable inflation. Since the August Monetary Policy Statement, the New Zealand economy has evolved largely as expected. The Committee agreed that excess capacity has dampened inflation expectations, and price and wage changes are now more consistent with a low-inflation environment. New Zealand’s annual consumer price inflation is assessed to currently be within the Committee’s 1 to 3 percent target band and is expected to converge to the target midpoint.
Members observed that global economic activity remains below trend
Global economic growth remains below its long-run trend and is expected to remain so for the year ahead. Economic growth in the United States and China is expected to slow. The disinflationary process in advanced economies has led to further reductions in official policy interest rates.
The Committee agreed that domestic activity is weak
Members agreed that increasing excess capacity is leading to lower inflationary pressure in the New Zealand economy. Economic growth is weak, in part because of low productivity growth, but mostly due to weak consumer spending and business investment. High-frequency indicators point to continued subdued growth in the near term. Some exporting businesses have been supported by higher export prices, particularly in the dairy industry.
Labour market conditions are expected to ease further, with filled jobs and advertised vacancy rates continuing to decline. More generally, weak house price growth, lower levels of net immigration, and ongoing fiscal consolidation from spending restraint, are expected to constrain aggregate demand growth.
The Committee noted that while wholesale and bank interest rates have declined, financial conditions remain restrictive, and credit demand remains subdued. The current preference for shorter-term mortgage rates by borrowers will increase the speed with which changes in the OCR influence household cashflows over coming months.
Members are confident that inflation is converging to target
The Committee agreed that monthly price indices signal a continued decline in consumer price inflation in New Zealand. Recent business visits suggest that weak demand is restricting the pass-through of increased input costs to prices faced by consumers. This is consistent with business surveys, which show a declining share of businesses intending to increase prices. Business price-setting behaviour is now more consistent with the Committee’s inflation remit.
The Committee assesses headline consumer price inflation to be within its 1 to 3 percent target band in the September 2024 quarter and to remain around the midpoint in the medium-term.
The Committee considered global and domestic risks
Members discussed how recent events in the Middle East could pose significant risks to both global economic activity and energy prices. Should conflict escalate, oil prices and shipping costs could rise, and adverse investor sentiment could trigger asset price corrections and tighter financial conditions. Members noted that the current market pricing of risk was especially sensitive to downside economic surprises.
Uncertainty about the effectiveness of recent policy actions in China also posed downside risks to New Zealand’s export growth, as well as export and import prices. Heightened uncertainty around the US elections, and the implications for US trade and fiscal policies, could also be significant for international financial markets and global economic activity.
Members noted that while domestic price-setting behaviour is now more in line with its mandate, there are still risks that further adjustments might be faster or slower than currently expected.
Members agreed to ease monetary restraint
The Committee agreed that the economic environment provided scope to further ease the level of monetary policy restrictiveness, consistent with its mandate of low and stable inflation.
The Committee discussed the respective benefits of a 25-basis point versus a 50-basis point cut in the OCR. They agreed that a 50-basis point cut at this time is most consistent with the Committee’s mandate of maintaining low and stable inflation, while seeking to avoid unnecessary instability in output, employment, interest rates, and the exchange rate. The Committee noted that current short-term market pricing is consistent with this decision.
The Committee acknowledged that the outlook is broadly consistent with the August Monetary Policy Statement. Members agreed that an OCR of 4.75 percent is still restrictive and leaves monetary policy well-placed to deal with any near-term surprises. The Committee confirmed that future changes to the OCR would depend on its evolving assessment of the economy.
On Wednesday 9 October 2024, the Committee reached a consensus to reduce the Official Cash Rate by 50 basis points, from 5.25 percent to 4.75 percent.
Attendees
MPC members: Adrian Orr (Chair), Bob Buckle, Carl Hansen, Christian Hawkesby, Karen Silk, Paul Conway, Prasanna Gai
Treasury Observer: James Beard
MPC Secretary: Marea Sing
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