© Reuters. The Not-So-Serene View Awaiting New Zealand’s Central Bank Chief
(Bloomberg) — From afar, the economy inherited by New Zealand’s new central bank governor seems quite serene. Scratch beneath the surface, and some pressures are building.
Adrian Orr today takes charge of an economy that’s in its 10th year of expansion, with record-high terms of trade and falling unemployment. That’s the good news. His economist’s eye will be swiftly focused on worsening capacity constraints, the sluggish outlook for inflation and whether low borrowing costs could rekindle a housing boom.
Read more: Who is Adrian Orr?
“The economy is more stretched than many people appreciate,” said Craig Ebert, senior economist at Bank of New Zealand in Wellington. “It’s a constant refrain from business, particularly over labor and skills. The real question is: why isn’t the economy generating the sort of inflation it normally does?”
Inflation remains stubbornly below the midpoint of the 1-3 percent band Orr’s required to target, even amid signals of increasing skill shortages and margin pressures. While wages should start to rise as government policies on reduced immigration, minimum pay and collective bargaining are introduced, a relatively strong currency and downtrends in global costs are keeping price pressures at bay.
That means Orr won’t be making his first rate move until next year, markets predict, ending a pause that’s held the benchmark at a record-low 1.75 percent since November 2016. He’ll have plenty to keep him busy in the meantime: carrying out reforms at the Reserve Bank including a new Fed-style dual mandate targeting full employment and price stability, as well as bringing in outsiders to decide policy.
Here are three charts that show the challenges awaiting Orr over the next few years:
Near the end of the previous Labour government in 2008, the jobless rate fell to the same level as inflation. That’s unlikely to be repeated — or desired — even with the RBNZ’s new dual mandate of full employment and price stability. Soon after Labour returned to power in October, Prime Minister Jacinda Ardern said unemployment “should be below 4 percent” — Orr would be squirming if inflation got to that level.
New Zealand’s economic growth is projected to pick up to more than 3 percent later this year, thanks in no small part to a prolonged period of record-low interest rates. The central bank estimates that borrowing costs will start to rise from mid-2019, and that growth will start to slow as a result.
The housing market has stabilized after a rapid cooling in 2017. Still, the RBNZ’s recent decision to slightly relax lending curbs on investors and owner-occupiers gave the market more of a lift than expected. As long as home-loan interest rates stay low and population pressures underpin demand, the housing market is likely to stay strong, with the further removal of lending restrictions likely to be only gradual.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.
Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.