New Zealand - Common Economic Statistics

Official Cash Rate

The Official Cash Rate is the benchmark interest rate set by the Reserve Bank of New Zealand and is the Bank’s main means of imposing monetary policy. The Reserve Bank of New Zealand (RBNZ) lends funds to financial institutions in the New Zealand banking system at the Official Cash Rate (OCR) and this influences the rates that the commercial banks charge their customers. The RBNZ pays interest on the funds that banks deposit with the RBNZ at one quarter of a percentage point below the OCR.

The RBNZ uses the Official Cash Rate as a way to manage commercial rates – for example, if the RBNZ wants to lower lending rates, it can reduce the OCR and make more funds available to the banks which they can then lend to their customers. By reducing the interest rate on the short-term loans, the financial institutions can decrease the commercial rates and still maintain margins.

Of course, the RBNZ can use this same approach to increase interest rates – perhaps in response to increased consumer spending raising fears that inflationary pressures are exerting a detrimental effect on the economy. In this case, the Bank hikes the OCR making it more costly for financial institutions to borrow short-term funds with the expected result being an increase in commercial rates to cover the new Official Cash Rate.

The Reserve Bank of New Zealand adopted the Official Cash Rate as its primary monetary policy approach in 1999. The RBNZ reviews the Official Cash Rate eight times a year at which point it announces if the rate will change or remain the same. Unscheduled OCR rate changes outside these dates are very rare and occur only under exceptional circumstances as witnessed shortly after the September 11 attacks when the RBNZ lowered the rate by 0.50% outside a scheduled announcement date to encourage spending in the economy. The rates were gradually increased again starting in March of the following year.

Official Interbank Rate

The rate of interest charged on short-term loans between banks in the New Zealand banking system. New Zealand financial institutions requiring short-term funds have two main sources to which they can turn for loans; the Reserve Bank of New Zealand (RBNZ), or directly from other banks participating in the inter-bank lending system. Loans provided by the RBNZ are charged interest at the Official Cash Rate (OCR) which is set by the Reserve Bank, whereas loans obtained through the interbank system are charged at the Official Interbank Rate.

Because the Reserve Bank can set the Official Cash Rate and has vast resources from which it can draw, the Official Cash Rate is New Zealand’s benchmark interest rate. In order to remain competitive, the Interbank Rate must be very close to the Official Cash Rate; otherwise, banks would only borrow from the Reserve Bank.

Conversely, lending banks would not offer loans significantly below the Reserve Bank’s OCR as they could instead lend to the Reserve Bank and receive payment at the Official Cash Rate which is always a quarter of a percent below the OCR. Essentially, the Reserve Bank can borrow or lend funds in whatever amount it needs to influence other rates within the New Zealand banking system and it is this fact that makes it possible for the RBNZ to manage interest rates.

Fixed-Income Securities

Fixed-income securities (i.e. bonds) have a defined yield and maturity date which can be plotted on a yield curve. The shape of the curve illustrates the relationship between expected yields and time to maturity. Bond yields are based on the duration of the bond (i.e. the time to maturity) and the creditworthiness of the issuer. In order to attract investors, non-government bond issuers must offer a higher return as these securities carry greater risks than bonds backed by the government and investors expect some form of premium in return for accepting the additional risk.

Long-term bonds are also at risk of losing value through a diminishing of the liquidity spread. This term refers to the difference between the bond yield and short-term interest rates. As interest rates rise, the locked-in yield of a bond becomes less valuable as it does not adjust higher to compensate for the rising interest rates, thereby reducing the true value of the return. If short-term interest rates rise above the yield, the investor actually has a negative liquidity spread.

Normal Yield Curve

A so-called “normal” yield curve is one that curves upwards in a concave manner. This indicates an increase in the yield (the x axis) as time to maturity (the y axis) increases. This follows the tenant of the Arbitrage Pricing Theory that states that the longer the term to maturity, the higher the yield. This approach rewards investors willing to lock their money into long-term bonds despite the increased risks noted earlier.

Flat Curve

A flat yield curve results when the yields are basically the same for all maturities. This indicates that investors are willing to accept yields on long-term instruments that do not include a premium above current short term yields. Investors would only accept this if they feel that the economy has little capacity for growth combined with the likelihood that interest rates will not rise.

Inverted Yield Curve

An inverted yield curve that slopes downwards over time indicates a negative outlook for the market in the long term and could suggest the onset of a prolonged economic downturn or possible recession. An inverted yield curve shows even greater long term pessimism than a flat curve – so much so that long-term bond yields actually fall below short-term yields (negative liquidity spread). The implication is that investors are willing to lock in investments at the current rate in the belief that yields will lower dramatically in the face of a worsening economy.

Humped Curve

A “humped” curve occurs when both short and long tem yields are equal but medium term yields are higher. This could indicate an expectation that the economy may be entering a period of growth but this growth is not expected to be sustained for the long term.

Gross Domestic Product

Gross Domestic Product (GDP) is the total value of all goods and services produced within the borders of a country for a given period of time. Everything produced in the country is counted without regard to the nationality of ownership of the firms producing the goods – in short, if it is produced within the country’s borders, it is counted as part of the GDP.

An increase in GDP is seen as a positive indicator suggesting that the economy is growing. This often results in increased demand for the dollar and could see an increase in value in the FX markets. As the value of a country’s production increases, a corresponding increase in the workforce is likely which suggests greater employment and higher incomes.

There are shortcomings in this assumption however, as volunteer work is not included in the basic GDP calculation; nor is work performed in the so-called underground economy. In this case, work done “under the table” or in exchange for other goods or services is not part of the GDP results.

Real GDP Versus Nominal GDP

When the value of goods and services from one time period is compared to another, changes in the inflation rate can account for some of the difference between multiple GDP results. In order to make it clear whether or not inflation has been factored in, economists use the term Real GDP to indicate GDP results that have been adjusted for inflation. This is the approach that best enables economists to determine if the economy has increased or contracted when compared to previous results.

GDP figures that have not been adjusted are usually referred to as Nominal or Current Dollar GDP amounts.

Employment Rate

Measures the change in employment levels between consecutive reporting periods. A decrease in employment is seen as a negative indicator as job losses are typically triggered by a lower demand for goods and services. The obvious impact of falling employment is a decline in consumer spending as government unemployment benefits do not cover the full wages workers earned earlier; a reduction in spending is an immediate response by affected households.

Add to this the fact that workers currently employed but feeling vulnerable with respect to their continued employment, also typically reduce spending in a bid to boost savings to prepare for possible job loss. This behavior further reduces consumer spending and can actually fuel additional layoffs.

Employment Change

Measures the intra-period change in employment rates. An increase in unemployment is seen as a negative indicator as job losses are typically triggered by a lower demand for goods and services. The obvious impact of rising unemployment is a decline in consumer spending as unemployment benefits do not cover the full wages workers earned earlier; a reduction in spending is an immediate response by affected households.

Add to this the fact that workers currently employed but feeling vulnerable with respect to their continued employment, also typically reduce spending in a bid to boost savings to prepare for possible job loss. This behavior further reduces consumer spending and can actually fuel additional layoffs.

Unemployment Rate

Measures the number of working age people in New Zealand not employed as of the reporting period. Also included in the survey is a survey identifying the age, gender, location, and length of time unemployed.

An increase in unemployment is seen as a negative indicator as job losses are typically triggered by a lower demand for goods and services. The obvious impact of rising unemployment is a decline in consumer spending as unemployment benefits do not cover the full wages workers earned earlier; a reduction in spending is an immediate response by affected households.

Add to this the fact that workers currently employed but feeling vulnerable with respect to their continued employment, also typically reduce spending in a bid to boost savings to prepare for possible job loss. This behavior further reduces consumer spending and can actually fuel additional layoffs.

Retail Sales

The Retail Sales report provides feedback on the total value of goods and services sold directly to consumers. This is one of the first indicators available each month that tracks spending behaviors. An increase in Retail Trade is seen as an indication of growth in the economy and this tends to support the value of the New Zealand dollar on the currency markets.

The Retail Trade report includes a breakdown of sales by various sectors and is produced each month. A rising trend is a positive sign of growth in the economy and shows that consumer demand remains strong suggesting that consumers are confident they can increase retail expenditures without compromising their ability to afford important basics such as food and shelter. The dollar can be expected to maintain or even gain value with a positive Retail Trade report.

Note however that a dramatic increase in retail spending over a short timeframe can be a sign of an economy expanding to the point where inflation becomes a concern. To combat this, governments typically tighten monetary policy by raising interest rates to make borrowing more costly in the hopes that spending will moderate. Higher interest rates also mean higher returns for the native currency so investors often increase holdings in currencies with higher interest rates thereby pushing up demand for the dollar.

Core Retail Sales

Core retail sales provides feedback on the total value of goods and services sold directly to consumers, but excludes gasoline, new car sales, and automobile repair shops. This is one of the first indicators available each month that tracks spending behaviors. An increase in Retail Trade is seen as an indication of growth in the economy and this tends to support the value of the dollar on the currency markets.

The Retail Trade report includes a breakdown of sales by various sectors and is produced each month. A rising trend is a positive sign of growth in the economy and shows that consumer demand remains strong suggesting that consumers are confident they can increase retail expenditures without compromising their ability to afford important basics such as food and shelter. The dollar can be expected to maintain or even gain value with a positive Retail Trade report.

Note however, that a dramatic increase in retail spending over a short timeframe can be a sign of an economy expanding to the point where inflation becomes a concern. To combat this, governments typically tighten monetary policy by raising interest rates to make borrowing more costly in the hopes that spending will moderate. Higher interest rates also mean higher returns for the native currency so investors often increase holdings in currencies with higher interest rates thereby pushing up demand for the dollar.

Consumer Price Index

The Consumer Price Index (CPI) is considered one of the most effective measures of inflation within an economy. Inflation is a necessary part of economic growth, but inflation exceeding 2% is generally seen as detrimental due to the erosion of the buying power of the nation’s currency. When high inflation becomes a concern, investors abandon the currency in search of other investment options thus lowering the demand for the nation’s currency.

CPI is a consumer-level analysis of the cost to buy a set basket of goods and services and is based on a starting index value of 100. If the CPI for the current period is 112 for instance, it means that it now costs 12% more to buy the same basket of goods today than it did when the index was first established. By comparing the monthly CPI data, you can easily detect changes in consumer buying power from month to month.

Core Consumer Price Index

Core CPI is calculated in the same manner as the CPI but items with high volatility – such as energy and food – are excluded. Because these products are vulnerable to dramatic price swings, they can lead to a distortion in the CPI calculation. For this reason, the Core CPI is considered a more accurate measure of inflation.

CPI is a consumer-level analysis of the cost to buy a set basket of goods and services and is based on a starting index value of 100. If the CPI for the current period is 112 for instance, it means that it now costs 12% more to buy the same basket of goods today than it did when the index was first established. By comparing the monthly CPI data, you can easily detect changes in consumer buying power from month to month.

Producer Price Index

The Producer Price Index (PPI) measures the change in prices that producers receive for their products on a month by month basis. Data is retrieved using surveys from various sectors including manufacturing, agriculture, mining, and utilities. Like the Consumer Price Index, the PPI compares the current price index to a base value of 100 – this means that a PPI value of 115 is 15% higher than the original base.

Unlike the Retail Sales figures, the PPI does not include taxes or any other shipping or distribution fees typically added as products move through the supply chain. An increase in the PPI index suggests an expanding economy with reasonable assurances of continued employment for those working in the manufacturing sector.

The PPI has a high market relevance and is closely watched as an indicator of current inflation levels. Like other inflation-based indicators, increasing PPI values could signal an interest rate hike intended to combat inflation. A possible interest rate hike may increase demand for the currency as an investment option as investors can expect increased returns as interest rates rise.

The Core PPI excludes volatile items such as energy and food which can distort the PPI figures should there be a sudden spike in oil prices or other unexpected event. You should also note that the PPI report is the first of the inflation-gauging reports available each month so it usually receives close scrutiny as investors look for signs of inflationary pressures that could trigger interest rate changes.

Core Producer Price Index

The Producer Price Index (PPI) measures the change in prices that producers receive for their products on a month by month basis. Data is retrieved using surveys from various sectors including manufacturing, agriculture, mining, and utilities. Like the Consumer Price Index, the PPI compares the current price index to a base value of 100 – this means that a PPI value of 115 is 15% higher than the original base.

Unlike the Retail Sales figures, the PPI does not include taxes or any other shipping or distribution fees typically added as products move through the supply chain. An increase in the PPI index suggests an expanding economy with reasonable assurances of continued employment for those working in the manufacturing sector.

The PPI has a high market relevance and is closely watched as an indicator of current inflation levels. Like other inflation-based indicators, increasing PPI values could signal an interest rate hike intended to combat inflation. A possible interest rate hike may increase demand for the currency as an investment option as investors can expect increased returns as interest rates rise.

The Core PPI excludes volatile items such as energy and food which can distort the PPI figures should there be a sudden spike in oil prices or other unexpected event. You should also note that the PPI report is the first of the inflation-gauging reports available each month so it usually receives close scrutiny as investors look for signs of inflationary pressures that could trigger interest rate changes.

Commodity Price Index

The Commodity Price Index examines the data on seventeen types of commodities that make up a large percentage of New Zealand’s exports. These commodities include agriculture, forestry products, and manufactured goods. The Commodity Price Index is published each month and provides early insight into output levels.

New Zealand ships approximately 25% of its production as exports to other countries primarily in the Australasia region. Because these exports are vital to production levels, any change in the Commodity Price Index will be reflected in the overall economy. This is why analysts pay very close attention to this index.

For forex investors, an increase in the Commodity Price Index should signal an increase in demand for the New Zealand dollar – or the “kiwi” as it is referred to by traders. An increase in the Commodity Price Index generally moves in tandem with an increase in demand for the kiwi as importers bringing New Zealand products into their country, will be forced to acquire additional New Zealand dollars thus increasing demand for the kiwi. Conversely, if the index proves to be lower, this indicates a decline in demand for the New Zealand dollar, thus causing the kiwi exchange rate to fall against stronger currencies.

Current Account

Shows the total inflow of new capital into a country. It is calculated as the total Trade Balance (exports minus imports), plus the net of income payments (interest and dividends), plus all unilateral transfers (foreign aid, taxes, and one-way gifts). If the resulting number is positive, it shows a Current Account surplus; a negative value is a Current Account deficit. Note that a deficit means that more money left the country than entered the country in the form of exports and other transfers.

Trade Balance

Compares the total value of imports and the total value of exports for the reporting period. A negative value indicates that more goods were imported than were exported (trade deficit) – conversely, a positive trade balance means that exports exceeded imports (trade surplus). This report is used by currency investors to determine demand for the dollar.

In the case of a trade surplus or a decreasing trade deficit from the previous month, it naturally follows that countries importing goods must convert their currency to the domestic currency of the country supplying the goods. This results in an increased demand for the domestic currency thereby increasing its value.

In the case of a trade deficit or a trend towards a decreasing trade surplus, the importing country must convert more of their currency to the currency of the country from which they are buying goods. This leads to an increased supply of the domestic currency on the FX markets which could cause the domestic currency to lose value against other currencies.