Interest rates unchanged, but a very different governor

New Reserve Bank Governor Adrian Orr has given the economy the thumbs up in his first monetary policy statement, and received praise in return for his relaxed and upfront style.

Orr said he was starting in his new role in "a sweet spot", with the economy well balanced, unemployment low and inflation stable. 

The former CEO of the NZ Super Fund described the decision to hold the official cash rate steady at 1.75 percent as "the easiest decision" he had taken in 11 and a half years. 

Although the OCR remains unchanged, the Reserve Bank has pushed out its projection for an interest rate hike from June 2019 to September 2019.

Orr told the news conference that followed the release of his first monetary policy statement that the hard decision would be what to do next, as the rate could either go up - or even further down.

He saw plenty to be optimistic about in the economy, saying our terms of trade, which measure the price we get for our exports against the price we pay for imports, had "returned to record highs.”

“It hasn’t felt like that because we all stare at Fonterra and worry about dairy prices,” he said, “but when you map the terms of trade against our trade weighted exchange rate you can largely explain the types of levels we’ve been at.”

A CEO more than a Governor

Wednesday was a busy day for Orr.

After delivering his first monetary policy statement (MPS) reporting on the bank’s decisions and methodology he had to appear before the Finance and Expenditure select committee.

In case it wasn't already apparent from his use of Māori, Fijian and sign language greetings at the news conference, as well as plain English and illustrations in the MPS, Orr told the committee that he would be a different kind of RBNZ governor. 

“The thing I want to do with the role is to be a CEO more than a governor,” he said. 

Orr said he wanted to improve the public awareness of the role of the bank and move beyond simply being seen as the institution that set official interest rates.  

“As exciting as monetary policy is, there are equally if not more exciting prudential and regulatory roles that we play,” Orr said. 

Earlier in the day he had told the news conference the RBNZ needed to be more open and outspoken about its regulatory activities and any issues with banking culture and risks it identified.

"What I think what this institution has been suffering from is a lack of open dialogue around what we have been doing for a long period of time. Instead we have left the banks and/or commentators own that space and not us," he said.

His last words to the committee reiterated that.

“We are very, very in the face of insurers and banks at the moment about a whole series of issues, we need to speak out more about what those issues are otherwise the dialogue is filled in by them,” he said.

That said…

The big story of the day was still Orr’s decision to hold the OCR steady and to push the forecast for a rate increase out to September 2019. 

The OCR, which acts as a benchmark interest rate for commercial banks, has been set at 1.75 for eleven consecutive decisions. The low interest rate is indicative of the RBNZ’s expansionary monetary policy which is designed to inject cash into the economy, stimulating growth and employment. 

It has to balance this against the need to keep inflation steady. Set interest rates too low, and inflation will run out of control, eroding people’s spending power and savings. 

Until now the Bank has been required to set interest rates with a view to get inflation between 1 and 3 percent and ideally around 2 percent over the mid-term With inflation sitting at 1.1 percent currently, the Bank will be hoping that capacity constraints in the economy conspire to push it back up towards 2 percent. 

Finance Minister Grant Robertson has added another target to the bank’s mandate. It must now target maximum sustainable employment. 

Orr also said that the direction of the rate was “equally balanced up or down,” meaning the bank could potentially cut rates even lower. 

“Only time and events will tell the timing of that,” he said.

He said that faltering international growth or a tightening in international financial conditions, like rising interest rates could encourage the bank to cut the rate. 

“Probably the most perplexing thing for us has been the very suppressed wage inflation,” Orr said.

Orr also gave an opinion on what he thought about cutting rates to push unemployment and underemployment even lower, triggering wage inflation as employers pushed up incomes to compete for the best staff.

“Yes, there is an argument,” said Orr about cutting rates to reduce under-utilisation, “but likewise there’s an argument to be raising rates.

He did not think interest rates and inflation needed to be higher to give the Bank a buffer in the event of a downturn.

“You can double-guess yourself too much,” he said.

Some Orrful puns 

The MPS was well received by economists with New Zealand’s major banks. 

Kiwibank’s economists channelled David Tua, saying “O is for Orrsome” and praising the “crystal clear” message. 

They said the MPS showed a “subtle shift towards a more dovish bias”, suggesting “likely take off for policy normalisation has shifted closer to 2020”. 

ANZ said the statement “could be interpreted as more dovish than it might have been” given positive developments in headline CPI inflation with a lower exchange rate and higher oil prices. He said ANZ believed the Reserve Bank was treating this as “noise”.

ANZ also highlighted the shift to making the bank’s message clearer and readily understandable.

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