graeme wheeler : the outlook for the new zealand economy speech by mr graeme wheeler, governor of the reserve bank of new zealand, to the canterbury employers ’ chamber of commerce, christchurch, 4 february 2015. * * * good morning and thank you for the invitation to meet with you. it ’ s become an annual tradition to begin the new year ’ s speaking engagements with the canterbury employers ’ chamber of commerce. the reserve bank has been speaking regularly at this event for 22 years, and it ’ s my great pleasure to join you again. we have often discussed how the reserve bank is viewing the state of the economy. as we enter 2015 my colleagues have several questions on their mind. what might we expect from the global economy and how could it affect us, what are the prospects for our economy and the main areas of risk, and how might monetary policy unfold in the future? in essence, the new zealand economy is performing well in many respects and the prospects are good for continued steady growth, falling unemployment and low inflation. but the risks and uncertainties around the global economy are becoming more complex, and this presents considerable challenges for new zealand enterprises, including the reserve bank. i will discuss the main issues that we are currently focusing on in the reserve bank – especially in relation to dairy prices, oil prices, house prices, and the exchange rate, and their implications for monetary policy. let me turn first to the global outlook. a more risky and uncertain global economy we expect economic growth in new zealand ’ s trading partners of around 3 ¾ percent this year – a little higher than last year and slightly above the average growth rate over the past 30 years. growth in trading partner economies ( annual percentage change ) source : haver analytics, rbnz estimates. bis central bankers ’ speeches while this might sound like business as usual, it ’ s also a more risky and uncertain environment. why is this? • first, the divergence in growth between countries has become more marked. this has taken place on two levels : the diminishing contribution of the advanced economies to global growth, and the wide disparities in growth within this group of countries. during 1995 – 2007 the advanced contributed around 60 percent of global growth. since 2008, this has reversed with the emerging economies accounting for about 70 percent of global growth. advanced economies are experiencing their weakest recovery in 70 years. the good news is that the us economy finally has momentum and has been expanding at an annualised rate of 4 percent since april

inflation outlook suggests that the ocr could remain at its current level for some time. how long will largely depend on the development of inflation pressures in both the traded and non - traded sector. the former is affected by inflation in our trading partners and movements in our exchange rate ; the latter by capacity pressures in the economy and how expectations of future inflation develop in the private sector and affect price and wage setting. in our ocr statement last thursday we indicated that in the current circumstances we expect to keep the ocr on hold for some time, and that future interest rate adjustments, either up or down, will depend on the emerging flow of economic data. some commentators have suggested that a cut in interest rates would be appropriate at this stage. with a sizeable positive supply side shock, such as a major fall in the price of oil, a cut in interest rates can be appropriate if there is sufficient capacity to accommodate additional demand. monetary policy settings could also warrant easing if domestic demand deteriorated and domestic price pressures abated further, perhaps in response to drought or a worsening in external economic circumstances. however, in our current situation there are important considerations why a period of ocr stability is the most prudent option. commodity price declines reduce headline inflation for a period but do not deliver a sustained decline in inflation. weak or even negative headline inflation that could be observed in 2015 is not reflective of underlying cost pressure in the non - tradables sector of the economy, and our medium term forecasts and measures of core inflation are well within the target band. new zealand is the only country among the advanced economies that has had a positive output gap in the past two years, our unemployment rate is low and falling, net inward migration and labour force participation is at record levels, and business and consumer confidence surveys remain strong. in addition, we have already seen some effective easing of credit conditions with declines in fixed - rate mortgages, at a time when we have financial stability concerns about accelerating house prices in auckland. similarly, before any decision to raise interest rates, we would need to be confident that capacity utilisation and labour market pressures were generating, or about to generate, a substantial increase in inflation. concluding comment new zealand ’ s economy is in a strong position with continued steady growth, falling unemployment, and inflation at low levels. the drivers of growth look sustainable, particularly in light of the increase in productive capacity that has occurred in recent years. monetary policy remains in a strong position to continue supporting ongoing