2. DAVID BENNETT (National—Hamilton East) Link to this
to the Minister of Finance
What do this morning’s Reserve Bank economic forecasts show?
Hon BILL ENGLISH (Minister of Finance) Link to this
The forecasts show that both consumer spending and business investment increased only modestly in the second half of 2010. There were recently some signs of an upturn but the earthquake has had a significant impact. The immediate impact will be to cut GDP by about 0.6 percent in the March quarter, and the Reserve Bank believes that growth this year will be relatively weak. The earthquake impact comes on top of an economy that was already a bit weaker than expected before Christmas.
Although the Reserve Bank is forecasting growth to peak at over 4 percent in 2013 and unemployment to reach below 5 percent, it believes that the interest rate cycle will be relatively subdued. Inflation is expected to be stable, and the picture on interest rates is similar. Although the current low official cash rate will not last indefinitely, the bank projects that 90-day rates will lift gradually to 4.6 percent by 2014, which is a low peak compared with the last cycle, where the official cash rate reached almost double that figure.
What discussions took place between the Government and the Reserve Bank prior to today’s official cash rate announcement?
More discussion took place than usual. About 2 weeks ago, just after the quake, the Reserve Bank contacted us and suggested that in the presence of a national emergency policy makers might best be mutually informed of the likely crisis response. We agreed and we briefed the bank on the emergency measures that the Government was taking and how it was likely to impact on the 2011 Budget. The bank, in turn, described its own economic forecasts, its thoughts on the appropriate stance for monetary policy, and the availability of cash and banking services in Christchurch. At all times the official cash rate decision remained with the governor; I was not entirely sure until this morning what the decision would be.
It is good to see that the projections of the Reserve Bank include increases in household savings. According to the bank, New Zealanders will continue to increase their savings rate. The bank expects that the Government will be back to financial surplus around 2014-15. This projection fits in with our own intentions.