The Monetary Policy Committee (MPC) cuts the official cash rate by 50 basis points to 4.25%. The decision comes as annual inflation has fallen to near the midpoint of the MPC’s target range of 1% to 3%. Inflation expectations are also close to the target, while core inflation is near the same point. If the economic outlook continues as expected, the MPC expects that the official cash rate could be cut further early next year.
Despite these positive developments, economic activity in New Zealand remains weak. GDP remains below potential, and the economy is showing excess capacity. This excess capacity has helped to ease inflationary pressures. Domestic price and wage behaviour has also become consistent with inflation nearing the midpoint of the target. On the other hand, lower import prices have helped to reduce headline inflation, reflecting the stability the economy is seeking.
New Zealand’s economic growth is expected to recover by 2025, as low interest rates support investment and boost spending. However, employment growth is expected to remain weak through mid-2025. Financial pressures are also expected to take some time to ease in some countries, which could limit the speed of recovery in labor markets.
Globally, economic growth is expected to remain subdued in the near term, amid heightened volatility from geopolitical conditions and policy uncertainty. These factors could lead to increased economic and inflationary volatility over the medium term.
In this context, the MPC agreed that inflation remaining close to the midpoint of the target range enhances the economy’s ability to cope with future inflationary shocks.
Summary of Meeting Minutes – November 2024
Consumer price inflation has remained within the MPC’s target range of 1% to 3%. Core inflation measures are also near the midpoint of the range, reflecting continued economic stability. Restrictive monetary policy and weak economic activity abroad have helped to slow domestic demand. In addition, low import prices have helped to dampen headline inflation, giving hope for a sustained achievement of inflation targets. Forward-looking expectations suggest that corporate pricing intentions and spare capacity are in line with the target. This gives the MPC confidence to proceed with easing monetary policy.
On the other hand, global economic activity is expected to remain subdued in the near term. Growth in both the United States and China is expected to slow over the coming year, while growth in Europe remains sluggish. In most advanced economies, headline inflation is close to target, but service sector inflation remains flat.
Central banks around the world are cutting interest rates, but the pace of cuts varies from country to country depending on differences in economic conditions. With global sovereign debt levels having increased significantly since 2020, this debt continues to expand. This increase poses risks that could lead to higher global bond yields. This is likely to cause risk premiums in global financial markets to increase, which could exacerbate future economic challenges.
These factors are expected to influence monetary policy decisions of major countries in the coming period. The need to strike a delicate balance between stimulating economic growth and controlling inflation will be crucial. At the same time, policymakers will continue to monitor the growing risks posed by inflation in the services sector, high debt levels, and continued global economic volatility.
Global economic activity is expected to remain weak, while major economies seek to improve their strategies to address the upcoming economic challenges.
Significant spare capacity over the coming year
New Zealand is expected to have significant spare capacity over the coming year. Domestic economic activity remains subdued, suffering from weak demand for and investment in durable goods. This weakness is reflected in lower activity in interest rate-sensitive sectors such as construction, manufacturing and retail. However, some service sectors have continued to grow, reflecting a divergence across sectors in the economy.
While there is spare capacity in the economy, this capacity is expected to gradually shrink over the forecast period. High-frequency indicators, derived from business visitation, suggest that the economy has stabilised in recent months. Economic growth is expected to recover from the fourth quarter of December, partly due to lower interest rates. However, there is uncertainty about the timing and speed of this recovery in the economy.
The Committee also noted that the economic outlook incorporates the fiscal assumptions from the 2024 Budget Economic Update. This reflects the government’s approach to future economic challenges based on current data.
In the labour market, conditions have improved slightly. However, wage growth has begun to slow, consistent with inflation returning to the midpoint of the target. Employment levels have declined markedly and job vacancies have declined, reflecting weak economic activity in the market. Unemployment is expected to remain high in the near term, as labour market recovery typically takes longer than economic output.
On the other hand, net migration to New Zealand has fallen significantly compared to the high levels in previous years. The rate of migrant arrivals has slowed and the number of New Zealanders leaving has increased, partly due to weak labour market conditions compared to Australia. These factors could further impact New Zealand’s labour market and population growth.
The outlook for the economy remains uncertain, with recovery dependent on a number of domestic and international factors.
