The economic expansion is becoming increasingly embedded and broad-based, with growth exceeding 3 percent in the second half of 2013. The drivers include supportive financial conditions, record high export commodity prices, resurgent construction activity related to the
With the high exchange rate damping tradable price inflation, headline inflation has remained below the mid-point of the target band but underlying pressures may be building. Nominal wage inflation has so far remained subdued. Nevertheless, house prices appear elevated by historical and international comparisons and most measures of affordability.
Strong terms of trade have narrowed the 2013 current account deficit to 3 1/4 percent of GDP. Net foreign liabilities remain high at 67 percent of GDP ay end-2013. The current account deficits are projected to widen in the medium term, partly related to the post-earthquake reconstruction investment.
After keeping the policy rate at 2 1/2 percent for almost three years, the Reserve Bank of
In response to house price inflation and to boost financial sector resilience the RBNZ last year took a number of prudential measures including requirements for banks to hold higher levels of capital against their high loan-to-value (LVR) housing exposure and tight limits on lending above 80 percent LVR threshold. The result has been a sharp reduction in high LVR lending.
Supported by healthy output growth, the government's aim of reducing the budget deficit is going according to plan. The deficit is currently projected to decline almost 1/2 percent of GDP to less than 1/2 percent of GDP this year due to restraint in expenditure growth. The plan would reduce public debt from its peak of 26 percent of GDP in 2013 to about 20 percent by 2018. The government just concluded selling stakes in state-owned enterprises, which generated proceeds of about 2 percent of GDP.
Financial system remains sound. The banks are well capitalized--all comfortably meet the new Basel III minimum capital requirement--and liquidity buffers are solid. Non-performing loan ratios are low and declining. Banks continue to shift toward more stable funding sources, and use of offshore borrowing has been reduced and is of longer maturity.
Growth is forecast to increase to about 3 1/2 percent this year and moderate to a trend rate of 2 1/2 percent over the medium term. Strong construction activity is expected to remain an important driver for near-term growth. The terms of trade are projected to ease somewhat due to an assumed moderation in global dairy prices, but remain high relative to historical levels and continue to boost growth in national income. With the economy set to grow above trend in the near-term, pressure on core inflation should follow, particularly from the construction sector.
Executive Board Assessment
In concluding the 2014 Article IV consultation with
The economic expansion is becoming increasingly embedded and broad-based. Headline inflation has remained subdued, but with the economy set to continue to grow above trend in the near term, pressures on core inflation should follow. The key external risk to the outlook remains a sharp slowdown in growth in
Staff welcomes the
With public debt relatively low and interest rates above the zero bound, the authorities have monetary and fiscal policy space to respond to shocks, and the free-floating
Banks remain sound, and recent stress tests show that the major banks would be able to withstand a sizeable shock to output, terms of trade, rising unemployment, and a fall in property prices. Nevertheless the banks face longstanding structural issues that will remain sources of risk over the medium term, including reliance on offshore borrowing. The recently introduced macro-prudential policy measures provide additional tools to safeguard financial sector resilience. These tools should be viewed as a complement to macroeconomic and micro-prudential measures. They should be used infrequently, with caution, and with the primary objective of limiting the buildup of system-wide risk.
View table here (http://www.imf.org/external/np/sec/pr/2014/pr14271.htm)
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