Media release
The Monetary Policy Committee today agreed to reduce the Official Cash Rate by 50 basis points to 4.25 percent.
Annual consumer price inflation has declined and is now close to the midpoint of the Monetary Policy Committee’s 1 to 3 percent target band. Inflation expectations are also close to target and core inflation is converging to the midpoint. If economic conditions continue to evolve as projected, the Committee expects to be able to lower the OCR further early next year.
Economic activity in New Zealand remains subdued and output continues to be below its potential. With excess productive capacity in the economy, inflation pressures have eased. Domestic price and wage setting behaviours are becoming consistent with inflation remaining near the target midpoint. The price of imports has fallen, also contributing to lower headline inflation.
Economic growth is expected to recover during 2025, as lower interest rates encourage investment and other spending. Employment growth is expected to remain weak until mid-2025 and, for some, financial stress will take time to ease.
Global economic growth is expected to remain subdued in the near term. Geopolitical conditions and policy uncertainty could contribute to increased economic and inflation volatility over the medium term.
The Monetary Policy Committee agreed that having consumer price inflation close to the middle of its target band puts it in the best position to respond to any shocks to inflation.
Summary Record of Meeting – November 2024
Consumer price inflation is sustainably within the Monetary Policy Committee’s 1 to 3 percent target range, and measures of core inflation are converging on the midpoint. Restrictive monetary policy and subdued economic activity overseas have slowed domestic demand. Lower import prices have also contributed to lower inflation. Expectations of future inflation, the pricing intentions of firms, and spare productive capacity are consistent with the inflation target being sustainably achieved. This provides the context and the confidence for the Committee to further ease monetary policy restraint.
Global economic activity expected to remain subdued
Economic growth rates in the US and China are expected to slow over the year ahead, while the growth outlook for Europe remains sluggish. Headline inflation is close to target in most advanced countries, but some persistence in services inflation remains. Central banks are reducing interest rates, although the pace of monetary policy easing varies across countries due to differences in economic conditions. Global sovereign debt levels have increased markedly since 2020 and continue to expand. This creates risks of higher global bond yields and risk premia.
Significant spare productive capacity expected over the next year
Domestic economic activity remains below trend, as a result of weakness in demand for durable goods consumption and investment. This has been reflected in falling activity in interest rate sensitive sectors such as construction, manufacturing, and retail trade. In contrast, some services sectors have continued to grow.
Considerable spare productive capacity remains in the economy, although this is expected to steadily reduce over the projection period. Consistent with feedback from business visits, high frequency indicators suggest that the economy has stabilised in recent months. Economic growth is expected to recover from the December quarter, in part due to lower interest rates, but there is uncertainty around the exact timing and speed of the recovery.
The Committee noted that the projections incorporate the fiscal assumptions from the 2024 Budget Economic and Fiscal Update.
Labour market conditions easing
Wage growth is slowing, consistent with inflation returning to the target midpoint. Employment levels and job vacancies have declined, reflecting subdued economic activity. Unemployment is expected to continue rising in the near term since the labour market typically takes longer to recover than output. Net immigration to New Zealand has reduced significantly from high rates over recent history. The rate of migrant arrivals has slowed, and departures of New Zealanders have increased, partly in response to subdued labour market conditions relative to Australia.
Lower OCR passing through to mortgage rates
Market interest rates have declined in response to actual and expected OCR reductions. The decline in mortgage rates has been less than for wholesale rates, in part reflecting changes in the composition and cost of bank funding. The average rate on outstanding mortgages has now peaked at 6.4 percent and is expected to decline to 5.8 percent over the next 12 months as borrowers refix their mortgage interest rates at lower levels in line with a falling OCR.
No trade-off between meeting inflation objectives and financial stability
The Committee noted the findings of the Bank’s November 2024 Financial Stability Report. Some households and businesses are experiencing financial stress. While non-performing loans remain low compared to past recessions, further financial stress is likely to emerge even as the economy recovers. The banking system remains well capitalised and in a strong financial position to support customers experiencing distress. The Committee agreed that there is currently no material trade-off between meeting inflation objectives and maintaining financial stability.
Inflation is expected to remain near the midpoint
Headline consumer price inflation has declined to close to the target midpoint, measures of core inflation are converging on the target midpoint, and inflation expectations at all horizons are close to the target midpoint. With significant spare productive capacity expected in the economy over the next 12 months, the Committee is confident that remaining inflation pressures will abate. Feedback from recent surveys and business visits suggest domestic price and wage setting behaviours are becoming consistent with inflation remaining sustainably at target.
There are near-term risks to the economic outlook
The Committee discussed two key uncertainties to the near-term outlook. While domestic price setting behaviour is now more in line with the Committee’s inflation objective, members discussed uncertainty about the persistence of some components of inflation. The Committee also noted that, while lower interest rates are expected to underpin a recovery in the domestic economy, the exact speed and timing of the recovery is subject to uncertainty.
There is a risk of greater inflation volatility over the medium term
Geopolitical risks and climate-related energy and food risks pose uncertainty over the medium term. There may be higher relative price volatility and more unpredictability in aggregate inflation. The Committee agreed that having consumer price inflation close to the middle of its target band puts it in the best position to respond to any shocks to inflation.
The Committee agreed to lower the OCR
With headline inflation close to the midpoint and measures of core inflation converging on the midpoint, the Committee has more confidence to continue removing monetary policy restraint. The Committee agreed that a 50 basis point cut is consistent with their mandate of maintaining low and stable inflation, while seeking to avoid unnecessary instability in output, employment, interest rates and the exchange rate.
If economic conditions continue to evolve as projected, the Committee expects to be able to lower the OCR further early next year.
On Wednesday 27 November the Committee reached a consensus to lower the Official Cash Rate by 50 basis points to 4.25 percent.
Attendees
MPC members: Adrian Orr (Chair), Bob Buckle, Carl Hansen, Christian Hawkesby, Karen Silk, Paul Conway, Prasanna Gai
Treasury Observer: Tim Ng
MPC Secretary: Chris Bloor
