Moreover, it appears that there is less spare capacity in the economy than we thought previously. These two factors taken together suggest that the point at which growth in demand will start to put upwards pressure on inflation is some 12 months earlier than previously assessed, in late 2000 rather than in late 2001. In other words, the economy appears to be growing slightly faster than potential output, and the output gap is closing. At the time of writing, it seems clear that the New Zealand economy has been maintaining a growth rate of something like 3 per cent per annum for the last 12 months. Credit continues to expand briskly, wages seem to be growing well ahead of productivity, and measured inflation is likely to increase significantly over the next year.
Monetary conditions remain stimulatory.
Indeed, they are considerably easier than they were prior to the release of our May Statement because of the fall in the exchange rate since that time. We recognise that all too often central banks find themselves behind the game, realising only after the event that they were a bit too slow to respond to changing conditions. Domestically, we suspect that confidence is still relatively fragile. There are a few signs that credit growth, while still not slowing, is at least no longer accelerating. Longer-term interest rates have already risen quite sharply, largely because of a strong rise in international bond yields.