adrian orr : opportunity or risk? our choice speech by mr adrian orr, governor of the reserve bank of new zealand, to the nzx issuer forum, auckland, 26 september 2019. * * * tena koutou katoa, welcome everyone and thank you for inviting me to come and speak to you today at the nzx issuer forum. i want to talk about some of the near - unprecedented challenges facing monetary policy, and how longer - term thinking can assist in our efforts to meet these challenges. the fact that we are celebrating the 150th anniversary of the nzx this year is a great prompt for longer - term thinking. first, the here and now. yesterday ’ s official cash rate announcement follows the monetary policy committee ’ s august decision to reduce the ocr by 50 basis points to 1. 0 percent, the lowest rate since the ocr was introduced in march 1999. when we made our august announcement we were rightly challenged by some commentators as to whether we knew something more than the conventional economic indicators have been showing? our answer remains – no we don ’ t. we operate in a transparent manner with primarily public data, but it is our job to be forward - looking. in making our decision, we assessed that the impact on the new zealand economy from slowing global economic growth and persistently low inflation necessitated further monetary stimulus – so as to maintain our inflation and employment objectives. we also judged that it would be better to move early and large, rather than risk doing too little too late. a more tentative easing of monetary policy risked inflation expectations remaining stubbornly below our inflation target, making our work that much more difficult in the future. we are pleased with the outcome of our decision to date. interest rates have declined across the board, as retail banks have passed lower lending rates to many businesses and consumers. the new zealand dollar exchange rate also eased, and the cumulative impact of the easier monetary conditions is now working through the economy. lower interest rates alter peoples ’ investment decisions, especially with the confidence that interests rates will stay low for a long time ahead. in forming our policy position we spend significant effort monitoring domestic and international economic trends. over recent weeks, for example, we have visited and listened to a wide group of new zealand business people. what we heard is that demand for new zealand ’ s goods and services remains sound. however, there is a multitude of business concerns and challenges. a common concern was that business capacity remains stretched, with some firms struggling

to fall sharply in march while the exchange rate remained close to its peak. furthermore, the negative income effects from falling export prices were accentuated by a bounce in landed oil prices and an increase in refinery margins. the latter meant that the expected income gain of around $ 400 per household from the initial oil price decline had halved. several considerations underlay the bank ’ s decision to cut the ocr in june 2015. statistical data revisions and the recent slowing in demand suggested that the output gap was likely to be smaller than forecast, non - tradables inflation looked to be low and stable, and the exchange rate had not adjusted sufficiently to the decline in the terms of trade. the decision to reduce interest rates was aimed at buffering the decline in the terms of trade associated with falling dairy and other commodity prices, and ensuring that the exchange rate contributed to moving inflation back towards the target mid - point. 2. the exchange rate the exchange rate has declined by 14 percent on a twi basis and 15 percent against the us dollar since mid - april 2015. other factors, in addition to policy signalling by the bank, have put downward pressure on the currency. these include falling dairy prices, various domestic economic indicators suggesting some moderation in demand growth, and the strengthening in the us dollar and sterling. we signalled for some time that we believed the high exchange rate was unjustified and unsustainable. in the june mps we described it as overvalued and suggested that a significant downward adjustment was justified and necessary to put new zealand ’ s net external position on a more sustainable path. since the june mps, the exchange rate has wheeler ( 2015 ), ‘ the outlook for the new zealand economy ’, speech on 4 february 2015. bis central bankers ’ speeches declined by 5 percent on a twi basis and global dairy prices have fallen by 16 percent ( figure 5 ). in the july ocr review we noted that the exchange rate had declined significantly since april 2015 and, along with lower interest rates, had led to an easing in monetary conditions. we indicated that further depreciation is necessary given the weakness in export commodity prices. our models suggest that the real exchange rate is currently in the vicinity of its long - run equilibrium value – if growth, inflation, and the terms of trade were at their long - run trends. however, the exchange rate remains above the level consistent with current economic conditions and, in particular, the current low level of export prices. reflecting this,