The Latest Reserve Bank's Monetary Policy Statement Simplified

FinanceTrading / Investing

  • Author Mark Lister
  • Published December 1, 2010
  • Word count 424

You may have noticed that the Reserve Bank’s 39-page September Monetary Policy Statement is somewhat long, and requires some substantial reading time. If you are only interested in finding out what the key points from this latest Monetary Policy Statement (MPS) are, we suggest you read through what we have extracted and condensed down here.

First up, the most talked about and hot topic discussed in the latest MPS instalment was the size of the cuts the Bank made to its economic growth forecasts. Many economists have expressed genuine surprise over the extent of these changes, as noted by their media commentary, and tone of their research notes issued post the MPS release.

Forecasters certainly expected that there would be some cutback in the Bank’s GDP growth forecasts, with many trimming their forecasts following bleak economic data over recent weeks, however, nobody thought that the RBNZ would decrease its 2011 GDP growth by 1.3%.

Looking back at the June MPS, this reduces the Bank’s GDP growth forecast for 2011 from the 3.8% to 2.5 percent in the latest MPS. In comparison to most other forecaster’s estimates, the RBNZ has a particularly pessimistic view of the economic outlook over the next few years. The Bank is now forecasting growth to be just 2.6 percent this year, 2.5 percent next year and 2.8 percent in 2012.

Reasons provided by the Bank for this major reduction to its growth forecasts include:

  • lower household consumption

  • an uncertain outlook for export prices

  • a mixed outlook for key export markets e.g. the USA

  • deleveraging

The use of the term deleveraging illustrates the process of paying down debt. Given that household debt levels multiplied over the boom years and now, with house prices no longer increasing, this debt has to be paid back out of cash flow instead of capital gains.

As a result, this relates to lower levels of consumption as cash is applied to reducing debt rather than on spending. Given that consumption is such as important component of GDP, decreased spending will pull down GDP growth. At the peak of the boom in 2007, household consumption accounted for 64% of GDP. This has fallen to 62% today and the RBNZ is forecasting it to decline further to 60% by 2012.

With regards to the Bank’s cuts to GDP growth, only time will tell if the Bank’s latest adjustments have gone too far. No matter the outcome, the message remains in tack; we face a period of below-average growth over coming years thanks to the debt built up over the boom years

This is a modified article from Mark Lister. To read the complete article visit www.craigsip.com. Craigs Investment Partners Limited (formerly ABN Amro Craigs.) is an NZX Firm that was established in 1984. It is one of New Zealand's largest and most established investment advisory firms.

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