Orr’s first OCR: a breath of fresh air

Commentators have welcomed new Reserve Bank governor Adrian Orr's "plain English" monetary policy statement - a change from the more formal way the statement has been delivered in the past.

In his first MPS since taking on the governor role in March, Orr kept the official cash rate at 1.75 percent and didn't give anything away about the direction of the next move. The New Zealand dollar fell.

ASB Bank chief economist Nick Tuffley says while the details of the statement were similar to the previous document, "the RBNZ substantially changed the way it lays [it] out. The result: greater clarity and a swiftly digestible message.

"The presentation is now being done in a way that makes the RBNZ’s messages much clearer and less vulnerable to misinterpretation."

It was the same welcome from NZ Funds' head of income Mark Brooks. "Adrian Orr has delivered a breath of fresh air to the staid central banking world. The plain English statement offered an honest and definitive assessment of the New Zealand and global economy... [which] will be welcomed by small and medium-sized business owners across the country."

The key point from the statement was that the official cash rate is not likely to move for some time, Brooks says, and that while economic growth and employment is robust the next move could be either up or down.

"The RBNZ substantially changed the way in which it lays out the monetary policy statement. The result: greater clarity and a swiftly digestible message."

- ASB chief economist Nick Tuffley

Reserve Bank forecasts continue to point to eventual rate increases - 1.9 percent in December 2019 (versus a prior forecast of June) and two percent by March 2020, although the bank says that could change.

"The risks around the OCR projection are broadly balanced ... Monetary policy may need to adjust as new data or information become available, or as our understanding of the economy develops."

Brooks says the confirmation that New Zealand interest rates are unlikely to change means "local interest rates will continue to be lower than many of our major trading partners.

"NZ Fund’s view is that this will lead to the NZ dollar falling over time and that it is an attractive time to hold foreign currency exposure."

Orr says economic growth and employment remain near their sustainable levels but inflation is still below the two percent mid-point of the central bank's target band. As a result, it expects to keep the OCR at "this expansionary level for a considerable period of time" as "this is the best contribution we can make, at this moment, to maximising sustainable employment and maintaining low and stable inflation".

According to the monetary policy statement, ongoing spending and investment by both households and government is expected to support economic growth and employment demand and business investment should also increase due to emerging capacity constraints. "The emerging capacity constraints are projected to see New Zealand's consumer price inflation gradually rise to our two percent annual target," Orr says.

"Our view is that this will lead to the NZ dollar falling over time and that it is an attractive time to hold foreign currency exposure."

- NZ Fund's Mark Brooks

Today's statement marks the first time the central bank must officially take employment into account after Finance Minister Grant Robertson and Orr signed a new policy targets agreement adding the goal of "supporting maximum levels of sustainable employment within the economy" to the existing goal of price stability.

The Reserve Bank interprets the term ‘maximum sustainable employment’ (MSE) to mean the highest utilisation of labour resources that can be maintained over time. However, the Reserve Bank says it does not have a specific numerical target for employment, unlike for inflation. Rather, it monitors a wide range of labour market indicators to form a holistic assessment of whether the economy is currently operating at MSE.

According to the monetary policy statement, employment is currently within a broad range of indicators of the maximum sustainable level. Spare capacity in the labour market appears to have been absorbed, although estimates of capacity are uncertain.

"Employment growth is expected to continue to outpace growth in the labour force, leading to further tightening in the labour market. This labour market tightening is reflected in a slight fall in the unemployment rate over the next three years," the statement says.

The New Zealand dollar fell to 69.37 US cents as at 9.40am from 69.83 US cents just prior to the release.

Fifteen economists polled by Bloomberg before the annoucement had expected rates to stay on hold. Given ongoing weak inflation, the central bank lowered its forecasts for inflation and the level of the New Zealand dollar on a trade-weighted index basis over the projected period. The TWI was recently at 72.88, well below the 75 average the RBNZ had previously projected for the current quarter. The TWI is now forecast to average 74.1 in the final two quarters of this year.

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