Be trained The Latest Monetary Policy Statement Simplified

You may have noticed that the Reserve Bank's 39-page September Monetary Policy Statement is somewhat long, as well as requires some substantial reading time. If you are only interested in finding out what the strategies 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 regarding as well as hot topic discussed in the latest MPS instalment was the size of the cuts the Bank done to its economic growth forecasts. Several economists have expressed genuine surprise over the extent of these changes, as noted by their media commentary, plus 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 different trimming their forecasts following bleak economic data over recent weeks, however, nobody thought that the RBNZ would cut 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 chiefly pessimistic view of the economic outlook over the next few years. The Bank is today forecasting growth to be just 2.6 percent this year, 2.5 percent next year also 2.8 percent in 2012.

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

- bring down household consumption
- an uncertain outlook meant for export prices
- a mixed outlook meant for key export markets e.g. the USA
- deleveraging

The eat of the term deleveraging illustrates the process of paying down debt. Given that household debt levels multiplied over the boom years also today, with home 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 cut down 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% now also 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 results, 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

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