Monetary Policy Affects Some Parts Of The Economy Differently: RBNZ Analytical Note

Some parts of the economy and prices for some products are more sensitive to a rise in the Official Cash Rate (OCR) than others.

Reserve Bank of New Zealand – Te Pūtea Matua research found that sectors that make or trade goods, as well as housing and real estate related sectors are among the most sensitive to changes in the Official Cash Rate.

“When the OCR increases, these sectors tend to cool more quickly. On the other hand, sectors like primary production including dairy and meat, are less sensitive,“ the Analytical Note authors say.

The research also looked at how monetary policy affects prices across a wide range of domestic goods and services, which do not face as much foreign competition as internationally traded goods.

“We found that prices for accommodation are quite sensitive. So, when the OCR increases, it puts downward pressure on the cost of going on holiday or business,” the authors say.

An OCR increase also has a strong impact on the cost of building a home. This means when the OCR increases, there is relatively more downward pressure on these costs than for prices of other domestic goods and services in the economy. Some services, like household power prices and insurance, are slower to respond to increases in the OCR.

We carried out this research because identifying which parts of the economy are relatively more sensitive to monetary policy allows us to better understand how various parts of the economy may react when interest rates change. It also means we can see more clearly if past policy decisions are working through to the economy as expected.

Key findings:

We investigate the sensitivity of output and prices to monetary policy at a disaggregated level, focusing on GDP sectors and CPI non-tradables subgroups in New Zealand. Identifying which parts of the economy are relatively more responsive to monetary policy allows us to better understand how various parts of the economy may evolve in response to policy decisions and to better assess whether past policy decisions are transmitting to the economy as expected.

For GDP, we find that goods-producing and goods-trading sectors are the most sensitive to monetary policy, while primary production and public services are the least sensitive.

For CPI non-tradables inflation, we find subgroups such as housing construction costs and accommodation services are more sensitive to monetary policy, while subgroups such as energy and insurance are less sensitive.

The small sample size leads to greater variation in estimated effects across model variations. As such, this analysis aims to serve as a starting point for further work in this area.

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