Reserve Bank Acting Governor says if inflation doesn't pick up from late next year 'a further easing of monetary policy' would have to be considered

Reserve Bank Acting Governor says if inflation doesn't pick up from late next year 'a further easing of monetary policy' would have to be considered

By David Hargreaves

The Reserve Bank's suggesting it may yet have to implement further interest rate cuts from next year if the forecasted increase in the rate of inflation doesn't materialise.

The comments, made by Acting Governor Grant Spencer on Wednesday in the RBNZ's last major communication with the market place for 2017 may come as a surprise to some economists. There are still people in the marketplace predicting that the RBNZ would actually increase interest rates next year.

The interest rate set by the RBNZ, the Official Cash Rate, is currently at a record low of 1.75%. In its most recent forecasts made last month the RBNZ was forecasting the OCR to be unchanged for a long period before rising slighlty from late 2019. The New Zealand dollar rose by about a third of a US cent to be just under US69c.

But in a speech to the Institute of Directors in Auckland, Spencer painted a picture of a central bank still grappling with a changed and rapidly advancing global environment in which inflationary pressures are no longer performing as they once did.

"In the context of the November Monetary Policy Statement, non-traded inflation is forecast to pick up from late 2018 in response to increasing capacity pressures," Spencer said.

"If this response does not eventuate then we would have to consider a further easing of policy to generate additional domestic demand pressure, particularly if global inflation remains low in line with our forecasts.

"However, we would need to be careful not to generate unwarranted instability in output, the exchange rate or indeed household debt."

Further into the speech, however, Spencer, highlighting that the RBNZ appears to be balancing risks, said that in its recent November Monetary policy statement, it assumed that weak global inflation will persist in line with the forecasts of the international institutions.

"This now puts some risk on the upside for inflation and interest rates. If the assumption proves incorrect and global inflation picks up in response to increased global growth, then we would likely see higher international interest rates, a lower NZ dollar exchange rate and higher traded goods inflation. This would put upward pressure on domestic interest rates," he said. It would appear to be this remark that has prompted the financial markets to send the value of the Kiwi dollar higher.

Spencer said persistently low inflation had prompted the RBNZ to think about whether it needs to tweak it’s approach to monetary policy.

Current global trends appeared to be "changing the nature of the price formation process in New Zealand". Spencer cited three significant global influences, namely the expansion of global supply chains, the rapid growth of China, and the growth of the digital economy.

"These factors may be reducing the leverage monetary policy has over inflation, although their persistence and impact on inflation in New Zealand remain uncertain,” Spencer said.

The RBNZ's monetary policy had less than fully offset the weakness in imported inflation, which was not expected to be so persistent and had been "overlaid with uncertain commodity price movements".

"The on-going shock has resulted in CPI inflation running below the [RBNZ's] 2% target mid-point. The policy response has been consistent with our flexible inflation targeting framework.

"More recently we have been assuming greater persistence in low global inflation and this is contributing to our current flat track for future OCR levels.

“The changes in domestic pricing behaviour are causing our flexible inflation targeting approach to become more flexible. In pursuing our long term price stability objective, relatively more weight is being attached to output, employment and financial stability.

"However, this can only be sustained if monetary policy’s long term price stability credentials are maintained," Spencer said.

He posed the question of how might the global developments impact New Zealand's monetary policy?

"Do we need to tweak our approach, or rethink our framework? 

"The first thing to say is that these changes to the inflation process are uncertain and it is unclear how long lasting they will be. 

"Also, with long-term inflation expectations anchored at 2%, there remains broad confidence in the effectiveness of the current framework. We should therefore be cautious about making any recommendations for change."

Spencer said that to the extent that the leverage of monetary policy over domestic inflation may have reduced, this suggests a cautious approach when responding to inflation deviations from target and careful attention to the RBNZ's assessment of economic slack.

"It may be appropriate for monetary policy to put relatively more weight on output, employment and financial stability relative to inflation. However, this can only be sustained if monetary policy’s long term price stability credentials are maintained."

This is the media release the RBNZ issued on the speech:

Inflation in New Zealand and world-wide has been persistently low since the 2008 global financial crisis, partly because of factors such as globalisation, the growth of China, the rise of the digital economy, and low inflation expectations.

In a speech today to the Institute of Directors, in Auckland, Reserve Bank Governor Grant Spencer said that persistently low inflation has prompted the Reserve Bank to think about whether it needs to tweak it’s approach to monetary policy.

Mr Spencer explained a number of significant changes over the past decade have affected the outlook for inflation:

  • Globalisation over the past 10 years has led to outsourcing of labour-intensive production to cheaper locations, which has lowered the price consumers pay for a wide range of goods and also placed downward pressure on wages for lower-skilled jobs in advanced economies.
  • The scale and growth of China’s economy has also had a profound effect. China has become the largest exporting nation in the world and its expansion of capacity has restrained the prices of industrial materials and a wide range of manufactured goods.
  • New digital distribution channels and falling prices for ICT equipment have lowered import prices and reduced barriers to entry across a range of markets. Online competition in retailing, financial services, travel services, education and health has significantly altered the competitive landscape and put downward pressure on prices.
  • The domestic economy has become more integrated with global markets, resulting in greater competition in traditionally sheltered sectors. Increased international labour mobility has been an important driver.
  • Low inflation expectations have influenced the way businesses set prices and wages, adding further momentum to low inflation.

These global trends appear to be changing the nature of the price formation process in New Zealand.

“These factors may be reducing the leverage monetary policy has over inflation, although their persisitence and impact on inflation in New Zealand remain uncertain,” Mr Spencer said.

Monetary policy has less than fully offset the weakness in imported inflation which was not expected to be so persistent and has been overlaid with uncertain commodity price movements. The on-going shock has resulted in CPI inflation running below the 2% target mid-point. The policy response has been consistent with our flexible inflation targeting framework. More recently we have been assuming greater persistence in low global inflation and this is contributing to our current flat track for future OCR levels.

“The changes in domestic pricing behaviour are causing our flexible inflation targeting approach to become more flexible. In pursuing our long term price stability objective, relatively more weight is being attached to output, employment and financial stability. However, this can only be sustained if monetary policy’s long term price stability credentials are maintained” Mr Spencer said.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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Gosh, no whiff of panic here

That's what he is saying, no need to panic, if inflation stays low a rate drop may be justified. A lot more astute than Wheeler who shot first and asked questions later thereby missing his target for almost his entire term as RBG.

Money's cheap now and will get cheaper. Savers either need to stop leeching off industrious people and start up a business or buy some bitcoins.

Alas, interest rate cuts could underpin another round of house price increases........



We made policy errors, everyone else is to blame, our models were faulty, its the worlds fault, we do not get out much, our hands are now tied, we simply do not know what to do, we should be replaced by dart throwing chimps.


hmmm, I might start crying....


Gotta protect speculators even if it means throwing savers under the bus.

Agreed. Will nail all retired savers as inflation turns their lifes work into dust. A bit surprised that Winston would let the Grey peoples party savings get hammered in this manner vs letting banks and specuvestors take the hit the deserve (aka Iceland).

You would have to be pretty silly to have money in savings accounts nowadays, as rates are pathetic.
Better to have in appreciating assets with a good return and safe, like property investment!

THE MAN 2, in the near future, when you are scratching to find a buyer to offload your buyer's remorse too, will you still think today's "silly" savers are silly?

My best guess is NO. Thankfully they exist because without them, who is there to save your financial ass?


TM2 - ever heard that Warren Buffett saying about not testing the depth of water with both feet?

I think he went in head first

Yes we can tell ;)

Many NZ pensioners have traditionally relied on interest income for their day to day expenses. You'd think a National government that has its stronghold in that age group would have paid more attention to their economic needs, rather than only those of property investors.

Still can't believe a "right-leaning" party campaigned on increasing subsidies to investors, either.

Rick - instead of interest income its now rental income...houses are the new banks...

So we just need to get all pensioners to withdraw their savings and buy houses?


I guess that will push rents down, anyway.

yes that makes sense......


Will make for some interesting capital ratios for the banks, too!

what inflation?

Also "retired savers" is a bit of an oxymoron, its the retired saved ie who expect to live off the great economy they helped knee cap.

On top of that, you miss that the pension funds are part of the parasitic group of "banks and specuvestors " the same pension funds that pay out to pensioners.

Its one huge circle, you cant chop one part without breaking it all.

This is why the RB is so petrified IMHO.

Savings / retirees are holding debt claims over the (surplus) real resources generated by the economy.
Its a promise only.
If the economy can't keep growing the real pie, the claims will quickly become worthless.
Monetary devaluation through QE is the road to worthless.

Only a demented psychopath would want to raise rates, given all the damage it would cause.

What if you are forced to raise rates? If the FED continues their rate increases, the NZD might drop below US$0.50, or lower. Good for exports, but see what it does to inflation.

skudiv - damage it would cause to who?

Oh go away! Skudiv.

Well put.

Another outstanding argument from Didge: "Go away people who don't think like me"

You are not worth the effort!

skudiv comments are always succinct and astute.

Hi Zachary,

Agree with what you say about skudiv.

Problem is he's in a tiny minority here.


They might be succinct but they are the opposite of astute

Or acolytes so deep into their mantra they cant see anything else.

Similarly, only the most self-absorbed of sociopaths would have tried to borrow growth from the future to protect themselves from the results of their speculation in the present, ultimately making everything even worse than it would have been.

But but but...Milton Friedman...but but...all those years at university.....

...You'd rather a controlled economy to dictate inflation?

There are more options than just 2....and certianly we can look back over the last 20~30years and clearly see how badly Milton's acolytes have done.


What does he mean by:

However, this [our long term objective regarding output, employment and financial stability] can only be sustained if monetary policy’s long term price stability credentials are maintained”

Monetary policy's credentials?

Hilarious!!!!!! I think that horse bolted years ago.

Nice one Kate

I wonder the sudden in NZ economic direction (at least the sentiment) is due to the change in political parties in power or something else.


Something else - China's in trouble.

have a look at China's energy and coal use (figures 13/14 scrolling down) .... deflation is kicking in


But regardless it doesnt matter what energy they are using ... TOTAL energy burn must go up significantly (so that NET energy available to provide goods and services goes up! Thats what growth / capitalism insists on....
(And dont bother thinking efficiency gains in energy use ... both irrelevant and there's jevons paradox).... falling affordability is the issue (there is plenty of scope to sell more porsches ... but it just doesn't seem to be happening..)


Milk powder?


Well, we're already exporting canned air and water, but I'm not sure about our expertise in clean energy. I think that China's likely to be capable on their own.

BTW, Japan is actually doing quite well exporting bottle water to China.



John Key lied and bluffed and conned and promoted polices that are causing long term damage. A corporate who focuses on looking good short term and moving on before the mess is uncovered. His legacy will be c##p. Literally. NZ is now in damage control.


What else do you have besides milk powder? Yelang (agricultural tribe) arrogance.

How curious.

Sounds like NZers are to be despised and pitied. They're really ripe for the taking.


I have been to China and I've actually done business in China too. I've also got friends in wealthy Chinese merchant families elsewhere in Asia. I've had great experiences with my friends, and I've had some interesting experiences doing business in China. The people I worked with were lovely. There are good sides and bad sides like any culture, including NZ's of course.

Do I think NZers should be wary about their sovereignty? Of course. I don't necessarily have the same regard for the leaders of many countries as I do for the everyday folk who just want to build a life - whether the leaders in China, the USA or NZ. I don't trust Donald Trump and neither do I have any reason to believe that Putin or Xi Jinping has NZ's best interests at heart.

I love reading history and I don't ultimately trust China's leaders to be any better than those of the USA have been to other countries across history. I don't see imperialism ending suddenly in human history. It may be changing, but it won't end. It may be China, or - if the demographic or economic timebombs that seem to be exist explode - it may be someone else. I don't think it's in the best interest of NZ to sell off large chunks of the most productive land or the surrounding supply chain into foreign ownership of any country at all.

Interesting. Would be cool to see an update version of this with some of the data presenting tools we have online now too :)


"they’re rebalancing their economic model... "

a nice bedtime story. The reality is somewhat different

Whenever anyone talks of moving from "investment driven to consumption driven" model they are basically saying moving from making something to making debt.... so who exactly does China get to make the stuff for it in exchange for debt?

@CherryTree: 樱桃树正在笑 ;)


Sorry I'm a clever Brit who knows how to use google translate. But I do agree with you Cherry Tree. :)


Thank you and so are you. Sorry in advance, if the others on this site have now discovered how to translate digitally. Technology is a great leveler (equalizer).



They are starting to change but from a pretty low base. but right.


It's still a twattish ad hom in Chinese.

@cherrytree, yes, yes, no.


Dummy spit of the year.


CherryTree comment Translated: "To understand, just "half a bucket of water." If you say this, out of fear or want to see a joke. If you are worried about it, "You are the heart of the South China Sea." If you look at jokes, then New Zealand, a small country that relies on China for eating, will be the first to suffer and the economy is not good. The Labor Party immediately stepped down. You left Labor supporters only cry for life"


Over-leveraged takes on a whole new meaning.


No, China is in trouble, as is the rest of the world. When this debt fuelled asset bubble finally pops its going to kill the world economy for a number of years. Its all a matter of timing now.

China seems to have a credit and real estate bubble of epic proportions. Not sure what you are basing your statement on.

Given a 7~10% annual economy growth the doubling time is 10~7years. So in that period China has to sell its entire output to somewhere else. Lets say it successfully switches to that doubling being internal consumption, the problem is its raw materials also doubles as does its waste, pollution etc. Fat chance.

exactly right - the resources for China to continue this path just aren't there (ie anywhere in the world - they are certainly looking for them everywhere possible).
Its simply not physically possible.

At the same time the demographic bubble starts to hit too, I guess...

Hmmmm. According to Google, this means 'Bottom of the frog'. Intriguing. Is it an insult, or something that doesn't translate? Hoping for clarification. Would work as an insult, kind of in the vein of 'lower than a snake's belly'.

Kakapo "allegory used to describe a sarcastic metaphorical people who are narrow-minded and self-righteous ignorance"

Thanks! My learnings for today.


I've noticed Chinese people getting a bit sensitive lately.

Coz they're being targeted left right and centre by the likes of CJ099, Kate etc etc who are being racially insensitive. I would be too if I were them.

Total rubbish DGZ try using google translate you idiot!! Oh I forget you're a dinosaur. :P

Let me balance the ledger - the US is in trouble.

Hey, c'mon, that's racially insensitive. DGZ says so.


Interesting Kate, can you please elaborate, thanks


Sorry Yvil, in all the other excitement - I missed answering your question;


If you really want to talk about China we should talk about why so little money is invested in farming. There are people manually spraying and harvesting crops. I saw so much room for improvement with very little in the way of money being invested to increase productivity. Yet the primary activity that is encouraged is farmers borrowing money against their land to buy apartments.

I don't think farmers should have barriers put up to improve their farms and their social standing. Investment in non-productive apartments instead of productive farms is not good for an economy.


It would be good to see more changes. At least those renting apartments in cities can get the same social benefits. New Zealand will have something to worry about when Chinese farmers can reach their full potential.



LOL - thank you!! I have been trying to learn Chinese from a friend in the last 2 years. I'm more comfortable with my written Chinese now haha ;-)



If you check photos 2 and 5 you will see that this property is sucking the life force out of the surrounding area.

I rather it be 'life force' than 'life form' - the wraith of Remuera LOL!!


Okay, if you think the IMF has it in for China, maybe Reuters reporting is more to your liking?

And the same investigative reporter has just updated that earlier story;


The Chinese are a very fraudulent people. I'm talking about mainland Chinese, not those born in NZ, Aus, Malaysia, Singapore etc.


What's your point?
Editors - I object to postings in a foreign language. Please sort this out.


Does Beijing have such a committee?


I know NZ has a Human Rights Commission, what I'm asking is whether China has one.


Jacinda will tell 习主席: "Let's Do This" LOL!!



You make your own culture seem so primitive to use only the terms for war. Again and again you have slagged people using war references. Is your only way to solve issues through violence and not through thought and diplomacy. How simple minded and limited you make your own culture appear. Why should anyone trust you when you repeatedly make threats in this conversation? Perhaps you should learn more of the Tao. Or even more of your own cultural history. Education may be the only path to improve the future of all nations unless we want to wallow in human suffering and brutish violent evil.

Haha Fritz. Hoist with your own petard. I remember well that time you tried to get me and DGZ banned for supposedly insulting a "community". Delicious.

I think you have a lot to learn about human rights. Being annoyed for being called out on a forum for being silly is not a human rights violation for a nation. Otherwise the entire Chinese nation would need to criminalise their own government first for the level of policing 'goodthink'. Really did they have to take 1984 as a roadmap? Choosing a dystopia is a terrible path. In the definition really. What is ludicrous is that old Chinese royal lines are still admired and held to high regard in the nation (just not advertised as such), the leaders still respect them more than those in the government.

I think that is very offensive, and I met many of them.
They have a general disregard for the rule of law and no moral stance about lieing for advantage.
So do many pakeha, including those in parliament.
Its not illegal.

That was beautiful. With friends like you.....


The Internet knows not this word, lieing?

dominatus posidatae

The Internet knows not this word, posidatae?

Wiki does not know it of course and only known to the greatest scholars of latin.


I'll take two.

I agree! It's too much to swallow IMHO.



due to the previous government letting the housing ponzi grow out of hand, where people have no money left after paying their mortgages..

RBNZ has released something that sounds a bit like the following from Australia. Increase wages, stoke some inflation and lets match incomes to these lofty house prices to avoid crashing back to historic fundamentals 1930s style:


To me it's yet another warning we are just one event away from full blown deflation with even cheaper money but extremely tight lending conditions.

Yip. Free money and bubbling bitcoin is about all thats left. Capitalism is done.

Something that is better that Bitcoin and more fun! Crypto Kitties!! I kid you not. ;)

Bloomberg article: The Ethereum Blockchain is Congested by Cats

Not so much tight asthere is little point in borrowing. ie you borrow to expand your business, if you cant expand as the economy is shrinking then it makes no sense to borrow. Even if you do borrow in effect you are now paying back interest plus capital which is worth more than when you borrowed it.

"deflation", indeed I think of it as the coming Second Long Depression (which was actually worse than the Great Depression by some metrics).

At that point goods will simply disappear from the market expensive to produce and ppls inability to pay for it.

Inflation is only needed by those who want summat for nowt.


Not a surprise, but what a disaster for New Zealand.
There is so little left in the can - 1.75% - to protect us with. It doesn't matter what the threat is/where it comes from no, as someone wrote above, panic - has set in!
I urge anyone who hasn't, to read Stephen Hulme's post and links on here carefully, because what he has alerted us to, via about to come true...

Potentially QE then ...

Whatever you think QE is, no. Our currency would be less than worthless if we monkey'd about with 'unconventional means'. Even QE by The Big Boys has been a disaster they don't see ( or won't acknowledge!). QE 1, maybe it had merit. After that...worse than a waste of time.....

Agreed. QE for nz will be meaningless, because at the end of QE that is when every nation defaults and no one trust one another with flat money, it will be all about who got more war assets to bully the lesser nations into submission. Which is why the US can afford to play with QE while NZ...... well we will be like a cheap whore with our legs wide open for china.

Yep, with OCR at 1.75% or thereabouts we are pretty much out of road

What is wrong with all these Central Banking guys! You don't stimulate price inflation ( that's' if you believe that is good!) by cutting the cost of the basic component of all things - the price of money. Lowering Interest Rates , Grant, will do exactly the opposite of what you want!! What happens, is what has happened - asset price inflation and speculative waste on all fronts. And that sets us all up for the Bubble(s) Implosion of catastrophic proportions.

which all suggests they know they have no choice... the future has been sold to stoke a few years more demand - there is no coming back from this.
When worldwide you have
- resources per capita in decline
- easy fossil fuel burnt and gone
- unaffordable infrastructure maintenance everywhere
- unaffordable pension schemes everywhere
- unpayable debt everywhere
- pollution issues...
- and more people rolling up for their share of the pie each year
where exactly is (demand) growth going to come from?

So fake growth it is till something gives

Pump the ponzi, baby.
One of the reasons I don't think prices will crash is the determination of our esteemed leaders and policy makers to keep the party going

I suspect this is not far from the truth. Not so much a pump the Ponzi as don't let the Ponzi deflate. Only problem is there are limits.....

What a great move, I always find that if I've made a mistake the best course of action is to double down on it, if it goes a bit more sideways I'll do it again - remember the old saying "two mistakes make a right, and three or more makes them perfect"

that's not really a saying, I've just made it up....

Ahhhh, the old "Martingale Gentleman Tactic" eh?

Ah so debt is money, how stupid is that...I always thought it was the other way round.

Inflation is money is some eyes. Glaringly obvious. The sun must have been in my eyes.

I thought Bankruptcy was caused by owing money, not having it. I thought that it bought Mutual Wealth, not wide spread debt.

We have tried importing inflation, via millionaires, and their trickle down treats, now we are having to re-think our poor Awklanders worth is dropping as the millionaires have seen the light, no Capital Gains, if no inflation.

Nothing but Capital Flight back to China, cos they is in serous trouble, if XI is upset with them, he will kill mucking about...he is now God....and Will have his pound of Flesh, at any price..

No safety in houses, like we have been sold. No profit in that , if no inflation.

No safety in Saving, no safe keeping it under the Pillow, the Mattress, the Safe Deposit Box, No flipping Houses for gain, What the hell are we supposed to Tell?

I was gonna ask the Man...but he thinks deflation will kill him too.....

Perhaps China has a point. They want their money back...And I for one do not blame them......


Debt is for mugs who Leverage, going for Broke....expecting inflation.....from using 'Other people munny"..And the Mugs...have realised...China Mugs break under will ours.

Man I sincerely hope so....

Childs' game this Monopoly... Get your Children one for Christmas...Win some, lose ain't real munny....when you owe it....and you take the Bubble Wrap off.

But when you pass not forget to pick up yer chicken feed...200$......Might buy a Turkey...this Christmas...if the renters move out.

"Sound fiscal management", as we call it.

It's a house of cards

Good to see a governor who is neutral and open to both, an increase or a decrase of the OCR

Wow. Holding level I can understand, but a cut? Ya gotta be sh***ing me! Oh well, perhaps it's just the times we live in.

On that note, an appropriate quote from the great writer H.H. Munro (from the short story "The Match-Maker"): "All decent people live beyond their incomes nowadays, and those who aren't respectable live beyond other people's. A few gifted individuals manage to do both."

Spencer appears clueless? Must be more pressure there than the guv is letting on?

Lower mortgage rates on their way?

Floating rates at 5.95% is very high in a deflationary world.


i find this interesting with our dollar down and fuel prices increasing which in turn increases the cost of everything
not to mention the other increases flowing through from businesses and government increased spending.

i think the price of housing and the large private debt taken on is the problem they are now worried about, any increase in interest rates is going to be a BIG problem

ANZ Survey of Business Confidence result for the month of November released last week.

The “pricing intentions” index increased sharply from +20% to +31% with significant increases in the retail, construction and services sectors.

The survey respondents' expectations of the annual inflation rate also increased from 1.90% to 2.30%.

When everyone is maxed out with asset debt then cheaper money is all but meaningless.

The debt crisis we are seeing globally is at breaking point. Its all delicately poised and hanging on for dear life, one false move and credit will dry up at which point the banks will decide their own interest rates.

RBNZ is almost impotent in this environment

"RBNZ is almost impotent in this environment"

Yip - everyone is in the matrix. Our dependencies are now global which is why there will be no place to hide when it goes bang.
Financial collapse, then supply chain collapse.

I agree and as I keep pointing out NZ no longer owns any of the major banks here so the Aussies will screw us like they always have done every time I have dealt with them in business. When the chips are down NZ is going to be paying for it. We should just hope the shit doesn't hit the fan and the ship keeps cruising with all passengers in party mode.If the ship goes down there are no life rafts for anyone.

Ask yourself: what effect will Amazon's arrival have on OZ & NZ prices of goods and in time of services, inflationary or deflationarly ?

Winston should have asked for closure of you know whom..

Could the government get into the financing business? Borrow 100 billion offshore at 2.5% for 10 years and give it to Kiwi bank to loan to existing and first home buyers (owner occupiers only) 3.5% for 10 years. 5% deposit maximum 760k loan and 800k property value. Giant ReFi for the NZ economy. Aussie banks would chuck a spaz. But it would give inflation a kick and arrest the falling house prices.

Some Asian countries have government owned Housing Development Banks that do cheap financing of house purchases. Not a big competition to private banks there, but here in NZ it may have a huge impact. Good suggestion.

Worked in the past. That's how Paula Bennett got into her first home. Was also how a few on this forum got into their first houses, from accounts in the past.

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