Over the past year or so, the New Zealand economy has evolved broadly as anticipated by the Committee. Core inflation and most measures of inflation expectations have declined, and the risks to the inflation outlook have become more balanced. However, headline inflation remains above the 1 to 3 percent target band, limiting the Committee’s ability to tolerate upside inflation surprises.
Restrictive monetary policy and lower global growth have contributed to aggregate demand slowing to better match the supply capacity of the New Zealand economy. With high immigration and weaker demand growth, capacity constraints in the New Zealand labour market have eased.
However, recent high population growth is supporting aggregate spending, as evident in upward pressure on dwelling rents, for example.
Internationally, global economic growth remains below trend and is expected to slow further during 2024. This subdued environment will support a further moderation in New Zealand’s import price inflation.
The outlook for the China economy remains particularly weak relative to recent historical norms, with structural factors constraining long-term growth. A more general risk to global growth is that central banks may need to keep policy interest rates at restrictive levels for longer than currently reflected by financial market pricing, to ensure that inflation targets are met.
Heightened geopolitical and climate conditions remain a risk for inflation. The recent rise in global shipping costs is one manifestation of these risks. The Committee remains alert to these relative cost pressures and will act to limit spillovers into general inflation if necessary.
The Committee remains confident that the current level of the OCR is restricting demand. However, a sustained decline in capacity pressures in the New Zealand economy is required to ensure that headline inflation returns to the 1 to 3 percent target. The OCR needs to remain at a restrictive level for a sustained period of time to ensure this occurs.
