Reserve Bank plays it cool

The Reserve Bank weighed in on the recent wave of economic good news on Thursday and its response was a fairly typical, cautious, “meh”. 

The Bank left the official cash rate at 1.75, and maintained its position that a hike would not be due until late 2020.

Governor Adrian Orr delivered the quarterly Monetary Policy Statement (MPS) on Thursday, which is an opportunity for the Bank to share its forecasts and thoughts on what lies ahead for the New Zealand economy.

Since the last MPS in August, New Zealand has enjoyed what Kiwibank chief economist Jarrod Kerr called “a trifecta of glamour statistics”: strong GDP growth, higher inflation, and low unemployment.

But the Bank’s reaction was muted. Orr noted the recent good news, but balanced it against continued risks at home (namely capacity constraints) and abroad (namely the US President and his trade wars).  

The relatively subdued and consistent MPS was a stark contrast to the Bank’s last, when it pushed out its projected rate hike by a whole year. This suggested a pessimism about the state of the economy, as the bank thought it needed more help for longer. 

There was no pessimistic bombshell on Thursday, but it wasn’t replaced by exuberant optimism either. 

Journalists and economists quickly seized upon the fact the Bank’s longstanding position that the next OCR move could be “up or down” was missing from this MPS, suggesting it’s next likely move could be a rate hike, rather than a cut. 

But Orr was quick to say that he was not taking a cut off the table.

“What we are saying is we are very data dependent,” Orr said. 

“The risks to the downside remain, global risks and domestic risks,” he said.

The statement doesn’t really help much. One would assume that in August Orr’s “up or down” move would have been data dependent as well — it’s a central bank, after all. 

Banks comment on the Bank

Bank economists, as they do, have helped read the entrails. 

ANZ had previously suspected the next move in the OCR would be downwards. Chief economist Sharon Zollner said cuts “now look much less likely in the short term”.

Kiwibank said the more steady message reflected the fact that the asymmetric risks, which were tilted in favour of a cut in August, have now evened up. That doesn’t mean the risks have gone away, but they’re not as threatening as they were three months ago. 

Kiwibank’s chief economist Jarrod Kerr remains slightly more optimistic than the Reserve Bank, projecting a hike six months ahead of the MPS’ forecast. 

Orr was also keen to stress that inflation remains below the 2 percent sweet spot that the Bank is meant to target over the long term. Keeping rates lower for longer will, ideally, help inflation hit 2 percent. 

Westpac chief economist Dominic Stevens noted that the Reserve Bank was now forecasting higher inflation, but it did not forecast changing the OCR in response to that inlation.

In other words, the RBNZ has chosen to take the run of recent strong data in the form of higher inflation, not a higher OCR forecast,” Stevens said. 

"The RBNZ is choosing higher inflation, rather than a higher OCR,” he said.

Stevens said this suggested the Bank felt “less bound” to the 2 percent midpoint target than under previous governors. 

…yet more on business confidence

Orr said the bank had been spending more time with businesses across the country since the August MPS to help it get a better picture about the state of the economy.

For that reason, the bank was not surprised by Wednesday’s better-than-expected employment statistics.

Far from the pessimism expressed in business confidence surveys, Orr said the bank had been hearing more about “capacity pressures, margin pressures and in particular the labour market”.

Those capacity pressures are good for the Bank, as they show that employment is getting to its maximum sustainable level, which the RBNZ is now mandated to target alongside its traditional inflation target. 

Reserve Bank chief economist John McDermott. Photo: Lynn Grieveson

Later, in a select committee hearing, Reserve Bank chief economist John McDermott said the businesses had been telling them that pessimism was not related to declining demand, but the fact many were not making much money due to rising costs eating into their profitability.

“They’re really busy not making much money,” he said.

McDermott said this showed a shift in business confidence surveys, which are usually correlated with fluctuating demand, rather than costs. 

But the Bank predicts that eventually rising costs and capacity pressures will be passed onto consumers. 

McDermott said the capacity pressures were good news for the Bank. Capacity pressures show unemployment falling, and this means businesses will have to work harder to compete for labour, which will lead to some inflation as businesses pass on rising labour costs to consumers. 

“As far as outcomes for monetary policy this is as good as it gets really,” McDermott said. 

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