The outlook for global growth has deteriorated over recent months due to weaker growth in China and other emerging markets. Prices for some commodities, including oil, have picked up but remain weak.
Monetary conditions are extremely accommodative internationally, with considerable quantitative easing and negative policy rates in some countries. Financial market volatility has eased in recent weeks, but markets continue to watch closely the policy settings of major central banks.
Domestically, the economy is being supported by strong inward migration, construction activity, tourism, and accommodative monetary policy. Dairy export prices have improved slightly, but are below break-even levels for most farmers.
The exchange rate remains higher than appropriate given New Zealand’s low commodity export prices. A lower New Zealand dollar is desirable to boost tradables inflation and assist the tradables sector.
There are some indications that house price inflation in Auckland may be picking up. House prices remain at very high levels and additional housing supply is needed. Housing market pressures are building in some other regions.
There are many uncertainties around the outlook. Internationally, these relate to the prospects for global growth, particularly around China, and the outlook for global financial markets. The main domestic risks relate to weakness in the dairy sector, the decline in inflation expectations, the possibility of continued high net immigration, and pressures in the housing market.
Headline inflation remains low, mostly due to low fuel and other import prices. Annual core inflation remains within the target range. Long-term inflation expectations are well-anchored at 2%. However, as we have previously noted, there has been a material decline in shorter-term expectations.
We expect inflation to strengthen as the effects of low oil prices drop out and as capacity pressures gradually build. Monetary policy will continue to be accommodative. Further policy easing may be required to ensure that future average inflation settles near the middle of the target range. We will continue to watch closely the emerging flow of economic data.