00:00I just want to pick up on that point that you made to the conference here earlier,
00:03your confidence that the output gap can close.
00:07What gives you that confidence?
00:09Well, that's how these cycles normally play out.
00:14So we've done 300 basis points of easing in a little over a year.
00:20As you mentioned, we went 50 basis points last year,
00:23and I think that was more about addressing the balance of risks,
00:27which shifted on us with that negative 0.9 Q2 GDP growth in the second quarter of this year.
00:35But, you know, the 50 points kind of offsets that, I think, to some extent.
00:38So we're expecting, you know, a modest pickup in growth over Q3 and Q4 into next year as that output gap closes.
00:47I want to talk a little bit more about that last decision,
00:49because the 50 basis points, as I mentioned, was more aggressive than a lot of market watchers were expecting.
00:54Can you take us into the room a little bit?
00:56How intense was the discussion?
00:58Sure.
00:58I think, like, the market had us picking, it was kind of picking somewhere between 25 and 50,
01:03given that we've never sort of cut by 33 or 37 basis points.
01:07I think it would have been a surprise to the market whichever way we went.
01:11And I think that pricing was pretty accurate, actually.
01:14It wasn't, you know, it wasn't a coin toss, but it was a very finely balanced decision,
01:18whether we did the 25 or the 50.
01:21And it was all about the balance of risk.
01:24As I said, that negative 0.9, it sort of raises the possibility of a more prolonged period of excess capacity in the New Zealand economy.
01:34So, you know, with meaning less medium term inflation pressures.
01:37So we wanted to react to that.
01:39But on the other hand, we've got inflation at 3% or around 3% currently.
01:44That's a prediction for the Q3 number.
01:47So, you know, we're looking through it.
01:49We know what's causing that.
01:51And we are confident that that is going to dissipate.
01:55But, yeah, it's a little nerve-wracking being on a monetary policy committee with inflation right up the top of our band.
02:01The risk, of course, is that it gets ingrained in people's expectations and stays up there for longer.
02:06So you mentioned you are looking through it.
02:08You're confident it's going to come down.
02:10How confident are you we're going to hit that 2% level by mid-2026?
02:14What would be the factors that drive inflation that low?
02:17Well, I think having excess capacity in the economy is a big part of that.
02:23So, you know, the relationship between the output gap, our measure of excess capacity in the New Zealand economy, and inflation is actually pretty solid.
02:30So the fact that we have had a period of excess capacity gives us confidence that those temporary factors that are keeping inflation elevated currently will dissipate.
02:42And our projections, we've got it getting down to around that 2% level in the first half of 2026.
02:49When you were weighing that last decision, it coincided with the quarterly survey of business opinion, which was a bit worried about excess precaution by households and businesses.
02:58Did that have much of an influence on your thinking and will it going forward?
03:02Yes, we like that survey, the QSBO by NZIR.
03:05It gives us a good read on how businesses are feeling.
03:09We got that data on the Monday before the decision on the Wednesday.
03:14And I think it just sort of solidified our thinking around the 50 basis point.
03:19So it was pretty sort of soggy from a business expectations perspective.
03:23There was also, I've got to say, plenty of pricing pressure in there as well.
03:29In fact, the gap between prices that businesses are paying for their productive inputs and what they're charging for their outputs is very wide at the moment.
03:38So, again, you know, that's sort of on the one hand, you've got slow growth.
03:42On the other hand, you do have pricing pressures in the New Zealand economy.
03:45And just juggling that on balance, we came down in favour of the 50.
03:49Now, you mentioned productive inputs there, and you told me earlier that you've been doing a lot of work around productivity.
03:55Sarah Hunter at the RBA mentioned this is definitely an issue in Australia as well.
04:00Tell us more about the productivity equation in New Zealand and what can be done to lift that.
04:04Yeah, so like I've personally been interested in productivity and done heaps of work on it over the last 20 years or so.
04:09Of course, we're interested in it at the Reserve Bank.
04:12It's a key input into the potential output of the New Zealand economy.
04:16I sort of think of it as half of our output gap.
04:19As you no doubt know, Paul, New Zealand has a pretty lamentable productivity growth record.
04:26The fundamental challenge in New Zealand is improving that.
04:30I talked earlier about a pickup in economic growth in New Zealand.
04:33We see that as a cyclical upturn in the economy as that output growth gap closes.
04:39The more fundamental longer-run challenge is to improve the rate of potential output growth in New Zealand,
04:46which is something that monetary policy has very little sway over.
04:49It's more about regulatory settings, et cetera.
04:52And as Sarah was talking about, the adoption of new technologies by business,
04:58I think now is potentially a very interesting period for businesses where there are options to increase their productivity.
05:04And one of the reasons why productivity growth in New Zealand has been weak is that businesses have been kind of slow to make the most of new technologies.
05:13In terms of stimulus, I mean, obviously, that's going to help some productivity and growth as well.
05:18Are the stimulus settings right?
05:20Does the economy need more, not just on the fiscal side, but what can you do on the monetary side?
05:24We've got economists seeing more cuts in November.
05:26Are they right?
05:27Yeah, well, on the fiscal side, the government's been very clear that it's all about consolidating government expenditures.
05:34And, you know, we're fine with that.
05:35Monetary policy moves second.
05:37We sort of take that as a given and respond accordingly.
05:41In the last record of meeting from last week, the committee said that, you know,
05:46we're open to further cuts in the official cash rate going forward,
05:50as required to make sure that those medium-term inflation pressures settle around the midpoint of the target band.
05:59So, you know, we're open to it, but let's see how the data plays out over the coming weeks and months.
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