More subdued growth, due to persistent spare capacity in the global economy following the global financial crisis, has been a key feature of the current New Zealand business cycle.

This is a key take-out from a review of the current business cycle, published today in the Reserve Bank Bulletin.  Listen to the Behind The  Bank Bulletin

The article summarises developments in the New Zealand economy since 2008 through the lens of monetary policy.

The article identifies five key phases: the global financial crisis of 2008-09; ‘green shoots’ recovery (mid-2009 to mid-2010); domestic caution and global uncertainty (mid-2010 to late 2012); commodity boom and construction upswing (early 2013 to mid-2014); and persistently low inflation (mid-2014 to present day).

Despite extremely accommodative monetary policy settings, growth in major advanced economies has proved to be slower than in past expansions. Growth in New Zealand has also been more subdued than in past business cycles, in large part due to weakness and uncertainty abroad. Against this international and domestic backdrop, consumer price inflation in New Zealand has been low.

A follow-up Bulletin article — due to be released in the coming weeks — will present some of the key features of the business cycle and the insights for monetary policy that have emerged or been reinforced.

| A RBNZ release  |  March 29, 2017   |||

Leading credit rating agency Moody’s Investors Service has reaffirmed New Zealand's highest possible Aaa sovereign credit rating with a stable outlook, highlighting the country's high economic resilience, effective policy making and very strong fiscal position.

"The latest Moody's credit rating statement is a very positive endorsement of New Zealand's economic performance and the Government's policy settings," Finance Minister Steven Joyce says.

"Moody's expects that New Zealand will be one of the fastest-growing Aaa rated economies over the next few years. It notes that New Zealand's strong population growth, including through immigration, lifts the country's economic potential.

“The Agency also notes that New Zealand's number one world ranking for ease of doing business supports the country's robust growth outlook.

"Moody's draws attention to New Zealand's targeting of and subsequent achievement of a Budget surplus in 2014/15 as evidence of the country's effective policy making.

"Finally it notes that the Government's focus on preserving strong public finances provides New Zealand with the room to buffer the economy from any future economic shocks or natural disasters."

Mr Joyce says the Government will continue to implement its strong economic plan, focusing on building better public services and infrastructure, steadily reducing net debt, and ensuring the benefits of economic growth are shared with Kiwi families.

"This latest report from Moody's underlines the benefits of all the work New Zealand has done over the last few years to strengthen our economy and our country's finances. It's a tribute to the hard work of all Kiwis and a position we can all take real confidence from,” Mr Joyce says.

Moody’s credit analysis of New Zealand is available here.

|  A Beehive release  |  March 25, 2017   |||

Statement by Reserve Bank Governor Graeme Wheeler:

The Reserve Bank today left the Official Cash Rate (OCR) unchanged at 1.75 percent.

Macroeconomic indicators in advanced economies have been positive over the past two months. However, major challenges remain with on-going surplus capacity in the global economy and extensive geo-political uncertainty.

Global headline inflation has increased, partly due to a rise in commodity prices, although oil prices have fallen more recently. Core inflation has been low and stable. Monetary policy is expected to remain stimulatory, but less so going forward, particularly in the US.

The trade-weighted exchange rate has fallen 4 percent since February, partly in response to weaker dairy prices and reduced interest rate differentials. This is an encouraging move, but further depreciation is needed to achieve more balanced growth.

Quarterly GDP was weaker than expected in the December quarter, but some of this is considered to be due to temporary factors. The growth outlook remains positive, supported by on-going accommodative monetary policy, strong population growth, and high levels of household spending and construction activity. Dairy prices have been volatile in recent auctions and uncertainty remains around future outcomes.

House price inflation has moderated, and in part reflects loan-to-value ratio restrictions and tighter lending conditions. It is uncertain whether this moderation will be sustained given the continued imbalance between supply and demand.

Headline inflation has returned to the target band as past declines in oil prices dropped out of the annual calculation. Headline CPI will be variable over the next 12 months due to one-off effects from recent food and import price movements, but is expected to return to the midpoint of the target band over the medium term. Longer-term inflation expectations remain well-anchored at around 2 percent.

Monetary policy will remain accommodative for a considerable period. Numerous uncertainties remain, particularly in respect of the international outlook, and policy may need to adjust accordingly.

||  A RBNZ release  |  March 23, 2017   |||

The Government’s books are better than expected, with a $1.1 billion OBEGAL surplus for the seven months to January, Finance Minister Steven Joyce says.

“Stronger tax revenues as a result of a healthier economy are flowing through to the Government’s financial performance,” Mr Joyce says.

Tax revenues year-to-date are 3.8 per cent more than they were predicted to be in Budget 2016.

“Company tax in particular is higher than expected, and that reflects the good performance of New Zealand companies in what is still an uncertain world,” Mr Joyce says.

The $1.1 billion OBEGAL surplus compares to Treasury’s forecast of a $517 million surplus at the start of the fiscal year.

Core Crown expenses for the seven months to January were $234 million lower than the Budget forecast, reflecting the Government’s ongoing commitment to prudent spending.

Mr Joyce says that a number of variables made the final out-turn for the full financial year hard to predict.

“The biggest variable at this stage is the cost of the Kaikoura earthquake and how those are allocated between this year and next year,” Mr Joyce says.

“The good news is that this Government’s strong economic management means we can afford to step in to help these communities and support them when they are most in need.

|  A Beehive release  |  March 07, 2017  ||

An upcoming review of banks’ capital requirements will continue to ensure confidence in the solvency of the New Zealand banking system, while encouraging efficiency, Reserve Bank Deputy Governor Grant Spencer said today.

During a speech to the New Zealand Bankers Association in Auckland, Mr Spencer outlined the context and scope of the review of bank capital that the Reserve Bank will undertake over the next year. Mr Spencer also set out broad principles that will guide the Review, centred on simplicity and conservatism.

Mr Spencer said in the wake of the global financial crisis, banks and regulators around the world have been reviewing capital buffers for banks to maintain to guard against the risk of losses. He said it is a very complex area which is full of trade-offs, and the Bank plans to comprehensively assess whether New Zealand’s capital framework remains fit for purpose.

“In broad terms, higher levels of capital will improve the soundness of the financial system as the likelihood of bank failures is reduced. However, the capital regime may reduce the efficiency of financial intermediation if ratios are pushed too high or standards are made overly complex. An appropriate capital regime will ensure a very high level of confidence in the solvency of the banking system, while avoiding unnecessary inefficiencies.”

Mr Spencer said the Reserve Bank will outline the broad areas of the capital framework that will be examined in the capital review in an issues paper released in April. The capital review will explore the definition of capital, how banks measure the risks they face (e.g.: risk weights) and the minimum capital ratios and buffers.

“The issues paper will provide the opportunity for stakeholders to give preliminary views on the areas we intend to cover in the review, as well as identify any other issues in the capital framework that could be examined. Any detailed policy positions and options for changes to the capital framework would be outlined in consultation papers later this year. We aim to conclude the review by the first quarter of 2018.”

|  A RSBNZ release  |  March 7, 2017  ||

Risks around future Official Cash Rate movements are equally weighted, reflecting balanced risks around inflation, Reserve Bank Governor Graeme Wheeler said today in a speech.

Speaking to Craigs Investment Partners’ Investor Day in Auckland, Mr Wheeler noted that the Bank’s February Monetary Policy Statement included a neutral bias with an unchanged OCR track until late 2019.

Expanding on the main risks around the interest rate projections, Mr Wheeler said: “In effect, there is an equal probability that the next OCR adjustment could be up or down. We consider the balance of risks for the global outlook to be downside. For the domestic economy, there is some potential upside for output growth if migration and commodity prices turn out to be stronger than forecast, but the risks around inflation look balanced.

“This means that if the economy were to develop in line with the Bank’s economic projections, which are based on several assumptions, then the OCR would remain at its current level over the next two years.

“However, small open economies such as New Zealand are hit by multiple shocks and the Bank assesses whether these, or a combination of them, warrants a change in monetary policy.”

While the outlook for global growth has improved over the past six months due to rising commodity prices and stronger business and consumer sentiment, several major sources of uncertainty exist in Europe, China and the United States. The balance of risk in the global economy is on the downside.

“Many of the risks in these regions are well known, and already reflected in relative prices such as interest rates, exchange rates and commodity prices. The greatest source of uncertainty relates to the US Administration policies in respect to its ‘America first’ policy platform. Although a substantial US fiscal stimulus could be positive for growth in the global economy, the prospect of a marked increase in protectionism – coming at a time when global trade is growing slowly and trade disputes are increasing – would be expected to have sizeable impacts on the global economy.”

Domestically, there are several uncertainties around the economy, including the future path for commodity prices, the exchange rate, migration, the housing market, and household saving.

“The greatest source of uncertainty currently lies around the housing market and the possibility that imbalances in the housing market might deteriorate. Fortunately, house price inflation has moderated substantially in recent months, but it’s too early to say whether this moderation will continue.

“Another risk is that the exchange rate remains higher than projected in the MPS, suppressing tradables inflation and net exports. As we indicated in the MPS, whether monetary easing would be required to offset this would depend on the factors driving the exchange rate (e.g. weaker global growth, higher commodity prices) and how domestic capacity pressures were changing.

“Our assessment is that the risks around the OCR are equally weighted.”

|  A RSBNZ release  |  Thursday 2 March, 2017  ||

Outright asset purchases may reduce opportunity to grow

More than half of New Zealand businesses are planning to increase their asset base in the first quarter of 2017, with the vast majority purchasing equipment to increase their asset base rather than replacing existing equipment. The bullish intentions resonate with other indices for business and consumer sentiment in New Zealand, reflecting strong economic growth as the economy tracks at 3.6 per cent, one of the highest rates in the developed world.

However, the latest round of the Alleasing Equipment Demand Index (the Index) has revealed that the way businesses are choosing to fund their assets, could hinder their growth prospects, with almost one in two intending to use equity or internal cash flow to fund their acquisitions.

The Index found that 51.2 per cent of businesses intend increase their asset base this quarter. This is the first time since the Index began in August 2015 that the quarterly increase has moved above 50.0 per cent. In comparison, only 3.0 per cent of businesses reported their intent to decrease their asset base.

Of those businesses looking to increase their asset base, the average increase is 8.9 per cent, another new high. In addition, more than 70.0 per cent of the assets earmarked for acquisition this quarter are part of new investment capital expenditure.

The sample group was divided into three segments, based on annual turnover, and for the first time included ‘upper corporate’ businesses with turnover in the $100 million to $250 million band.

This segment proved to be the most bullish, with 56.9 per cent planning an asset base increase, closely followed by 55.2 per cent of SME’s ($5-20m annual turnover). This leaves lower corporates ($20-100 million) at a significantly lower 41.5 per cent planning an increase.

While businesses are planning acquisitions, the biggest source of funds is internal, with 46.8 per cent saying they will use equity or internal cash flow to fund the purchases.

Commenting on these results, Alleasing Chief Executive Officer, Daniel Blizzard, said: “While this shows that New Zealand businesses are self-reliant, it also reveals significant potential for further growth if these businesses opt to fund their assets another way.

“Our research has found that one in five businesses are suffering from capital constraints, which are inhibiting their ability to expand. Nearly half of these businesses would like to achieve growth through M&A, but a lack of access to capital is frustrating their plans.

“The Index shows that while confidence is strong, major opportunities are being missed because businesses aren’t able to access sufficient capital. This could be a result of banks becoming cautious of how many loans they grant prior to the upcoming implementation of Basel III. If businesses want to grow and remain profitable, they will need to find alternative capital sources instead of relying on outright purchases.”

Leveraging an alternative capital source has the potential to release significant funds for cash flow or business investment. Index data reveals that 16.0 per cent of the asset base of New Zealand businesses is leased or financed. Based on recent data from Statistics New Zealand, this equates to businesses owning assets worth more than two times the value of the nation’s GDP. That is nearly $1.8 trillion of assets, of which, $992 billion are financial assets owned by the finance and insurance sector (i.e. rented or leased). This suggests that businesses across the country hold just over $800 billion in non-financial assets*.

Applying the result from the Alleasing Index, 16.0 per cent of this is leased or financed, leaving a balance of $672 billion in owned assets, compared with national GDP of $255 billion.

“Not all of these assets could be leased or re-financed, but it is clear that adjusting even a small percentage could have a significant impact. By releasing these funds back into a business the capital constraints that are inhibiting growth may be overcome,” says Alleasing’s Daniel Blizzard.

*Non-financial assets are classified as machinery, equipment, transport vehicles, non-residential buildings, marketing assets etc. as stated by Statistics New Zealand.

Download your copy of the New Zealand Equipment Demand Index.

|  An Alleasing release  |  february 16, 2017  ||

The Reserve Bank will continue to engage with stakeholders about its proposed ‘Dashboard’ approach to quarterly disclosure for locally incorporated banks.

The dashboard aims to enhance market discipline by making key information on locally incorporated banks available on the Reserve Bank website in a timely manner and in an accessible format which can facilitate comparisons across banks.

The Reserve Bank ran a consultation on the dashboard concept last year, and has today published a summary of submissions.

Deputy Governor Grant Spencer said all 18 submitters were supportive of the Reserve Bank’s objective to improve the effectiveness of public disclosures by banks, but some raised issues about publication timing, control of the data published, data comparability and the proposed inclusion of short term liquidity metrics.

“After carefully reviewing all feedback, the Reserve Bank considers that the concerns raised about the Dashboard proposal should be able to be addressed, and the Dashboard remains the Bank’s preferred option to enhance market discipline by increasing the effectiveness of the bank disclosure regime.

“The Bank will further engage with submitters and stakeholders in the coming months, to discuss possible refinements to the dashboard concept and the issues raised during consultation.”

Submissions received as part of the dashboard consultation are available on the Reserve Bank’s website. This consultation was subject to the Bank’s new policy to publish submissions by default unless submitters request otherwise.

More information:Summary of submissions (PDF 163KB)Submissions receivedConsultation document – released September 2016 (PDF 1MB)

Statement by Reserve Bank Governor Graeme Wheeler:

The Reserve Bank today left the Official Cash Rate (OCR) unchanged at 1.75 percent.

The recovery in commodity prices and more positive business and consumer sentiment in advanced economies have improved the global outlook. However, major challenges remain with on-going surplus capacity in the global economy and rising geo-political uncertainty.

Global headline inflation has increased, partly due to rising commodity prices. Global long-term interest rates have increased. Monetary policy is expected to remain stimulatory, but less so going forward, particularly in the US.

New Zealand’s financial conditions have firmed with long-term interest rates rising and continued upward pressure on the New Zealand dollar exchange rate. The exchange rate remains higher than is sustainable for balanced growth and, together with low global inflation, continues to generate negative inflation in the tradables sector. A decline in the exchange rate is needed.

Economic growth in New Zealand has increased as expected and is steadily drawing on spare resources. The outlook remains positive, supported by ongoing accommodative monetary policy, strong population growth, increased household spending and rising construction activity. Dairy prices have recovered in recent months but uncertainty remains around future outcomes.

Recent moderation in house price inflation is welcome, and in part reflects loan-to-value ratio restrictions and higher mortgage rates. It is uncertain whether this moderation will be sustained given the continued imbalance between supply and demand.

Headline inflation has returned to the target band as past declines in oil prices dropped out of the annual calculation. Inflation is expected to return to the midpoint of the target band gradually, reflecting the strength of the domestic economy and despite persistent negative tradables inflation. Longer-term inflation expectations remain well-anchored at around 2 percent.

Monetary policy will remain accommodative for a considerable period. Numerous uncertainties remain, particularly in respect of the international outlook, and policy may need to adjust accordingly.

View the Monetary Policy Statement: http://www.rbnz.govt.nz/monetary-policy/monetary-policy-statement

Watch the Monetary Policy Statement press conference live-stream at NZT 10am: http://www.rbnz.govt.nz/research-and-publications/webcasts

Listen to the Reserve Bank of New Zealand’s February Monetary Policy Statement, as read by Governor Graeme Wheeler: https://soundcloud.com/te-putea-matua

The Government's 2017 Budget will be delivered on Thursday 25 May, and will be centred on providing opportunities for all Kiwis to get ahead, Finance Minister Steven Joyce says.

"The 2017 Budget will build on the strengthening performance of the New Zealand economy over the last several years. It will focus on creating the conditions for further growth and greater prosperity for all New Zealanders," Mr Joyce says.

"New Zealand businesses have generated 328,000 new jobs since 2008, and average weekly wages have grown by 26.1 per cent – more than double the rate of inflation. Budget 2017 will seek to give businesses the confidence to keep investing and keep growing, to provide more opportunities for New Zealand families.”

A key element of the Budget will involve investing in the public services and building the infrastructure for a growing New Zealand.

"As the economy grows, we have a little more headroom to invest in better public services. However, as always, our focus will be on achieving better results, and not just tipping in more taxpayers money," Mr Joyce says.

“It is also very important to remain mindful that the money the Government spends comes from hard working Kiwi families. We remain committed to reducing the tax burden on lower and middle income earners when we have the room to do so.”

Mr Joyce says the Budget will continue a relentless focus on reducing debt as a percentage of GDP.

"A key part of building a resilient economy is creating the necessary buffers to deal with the next economic shock. The Government remains committed to its target of reducing net debt to 20 per cent of GDP by 2020/21," Mr Joyce says.

|  A Beehive release  |  February 08, 2017  ||