Monetary Stimulus Reduced

The Monetary Policy Committee agreed to reduce the current stimulatory level of monetary settings in order to meet its consumer price and employment objectives over the medium-term.

The Reserve Bank will halt additional asset purchases under the Large Scale Asset Purchase (LSAP) programme by 23 July 2021. The Committee will keep the Official Cash Rate (OCR) at 0.25 percent and the Funding for Lending Programme unchanged.

The global economic outlook continues to improve, providing ongoing price support for New Zealand’s export commodities. Global monetary and fiscal settings remain at accommodative levels supporting the recovery in economic activity. Rising vaccination rates across many countries are providing further economic impetus. However, the need to reinstate COVID-19 containment measures in some regions highlights the ongoing global health and economic risks posed by the virus.

Recent data indicate the New Zealand economy remains robust despite the ongoing impact from international border restrictions. Aggregate economic activity is above its pre-COVID-19 level. Household spending and construction activity are at high levels and continue to grow. Business investment is now responding to capacity pressures and labour shortages, and measures of economic confidence continue to improve.

The Committee reiterated that there will be near-term spikes in headline CPI inflation in the June and September quarters. These reflect factors that are either one-off in nature, such as high oil prices, or expected to be temporary in duration, such as supply shortfalls and higher transport costs.

The Committee agreed that, in the absence of any further significant economic shocks, more persistent consumer price inflation pressure is expected to build over time due to rising domestic capacity pressures and growing labour shortages. However, the Committee noted that uncertainties remain as to the pace and magnitude of any pass-through of costs onto medium term inflation, especially given reported underutilisation of labour, modest wage growth, and well anchored inflation expectations.

The Committee noted that medium-term inflation and employment would likely remain below its Remit objectives in the absence of some ongoing monetary support. However, the Committee agreed that the level of monetary stimulus could now be reduced to minimise the risk of not meeting its mandate.


Summary Record of Meeting

The Monetary Policy Committee discussed the economic developments since the May Statement. The Committee noted that global economic growth continued to recover. The positive outlook for economic activity is being supported by rising vaccination rates in many countries, and continued accommodative monetary and fiscal policies supporting household spending. The Committee noted, however, that the need to reinstate COVID-19 containment measures in some regions highlights the ongoing global health and economic risks posed by the virus.

The Committee noted that recent economic data indicate the New Zealand economy remains robust despite international border restrictions. Aggregate economic activity is above its pre-COVID-19 level. Household spending and construction activity are at high levels and continue to grow, and there has been an improvement in business confidence and rising business investment intentions.

The Committee agreed that economic conditions since late 2020 have been persistently stronger than anticipated. Members noted that capacity pressures were now evident, reflecting domestic spending recovering more quickly than production. Domestic incomes are being supported by fiscal and monetary policies, and the ongoing strong terms of trade. Employment growth has remained strong and survey measures of economic confidence have risen from their extreme low levels.

The Committee agreed that, on aggregate and for the time being, domestic spending and export earnings have compensated for the absence of international tourism earnings. While important regional and industry differences remain, the New Zealand economy has recovered strongly since the relaxation of the health-led lockdowns of mid-2020.

The Committee reiterated that there will be near-term spikes in headline CPI inflation over the June and September quarters. These reflect factors that are either one-off in nature, such as high oil prices, or expected to be temporary in duration, such as supply shortfalls and higher transport costs.

The Committee agreed that, in the absence of any further significant economic shocks, more persistent consumer price inflation pressure is expected to build over time due to rising domestic capacity pressures and growing labour shortages. However, the Committee noted that uncertainties remain as to the pace and magnitude of any pass-through of costs onto medium term inflation, especially given reported underutilisation of labour, modest wage growth, and well-anchored inflation expectations.

The Committee discussed the stance of monetary policy in light of the improving economic activity. Members agreed that the major downside risks of deflation and high unemployment have receded. The Committee agreed that a ‘least regrets’ policy now implied that the significant level of monetary support in place since mid-2020 could be reduced sooner, so as to minimise the risk of not meeting its mandate.

As required by their Remit, the Committee assessed the impact of monetary policy on the Government’s objective to support more sustainable house prices. The Committee agreed that the recent rate of growth in house prices remains unsustainable. Members noted that some of the factors supporting the ongoing house price increases have eased. These include a rise in housing supply as construction picks up pace, and more constrained investor demand due to increased loan-to-value restrictions and changes to housing tax policies. The Committee agreed that any future increases in mortgage rates will further dampen house price growth.

The Committee noted staff advice that while the Large Scale Asset Purchase (LSAP) programme has been an effective policy instrument to-date, market conditions and functioning have improved substantially since the programme’s inception. The Committee agreed that further asset purchases under the LSAP programme were no longer necessary for monetary policy purposes and directed staff to halt purchases by 23 July 2021. Members noted that the LSAP programme remains an important tool for supporting the efficient functioning of the New Zealand debt market if required, and remains an important monetary policy tool if needed.

The Committee noted that the Funding for Lending Programme (FLP) would continue to be available to participants. Members agreed this tool provides a useful means of transmitting monetary policy given the pricing moves in line with the prevailing Official Cash Rate (OCR).

Members reiterated their opinion that the OCR is the preferred tool when responding to economic conditions in the future. The Committee agreed that some monetary stimulus remains necessary to best ensure CPI inflation will be sustained at the 2 percent per annum target midpoint, and that employment is at its maximum sustainable level. However, the Committee also agreed that the level of monetary stimulus could now be reduced to minimise the risk of not meeting its mandate.

On Wednesday 14 July, the Committee reached a consensus to:

  • hold the OCR at 0.25 percent;
  • discontinue LSAP purchases by 23 July 2021; and
  • maintain the existing Funding for Lending Programme (FLP) conditions.

Attendees:

Reserve Bank staff: Adrian Orr, Geoff Bascand, Christian Hawkesby, Yuong Ha

External: Bob Buckle, Peter Harris, Caroline Saunders

Observer: Caralee McLiesh

Secretary: Sandeep Parekh

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