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Roger J Kerr has no problem with the RBNZ reminding everyone that the markets’ interpretation of monetary policy intentions or settings is sometimes off beam and not helpful to what the RBNZ is trying to do

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Roger J Kerr has no problem with the RBNZ reminding everyone that the markets’ interpretation of monetary policy intentions or settings is sometimes off beam and not helpful to what the RBNZ is trying to do

By Roger J Kerr

It is not exactly a PR “charm offensive” from the RBNZ, however over this last week they have been on the front foot with a “let us explain offensive” stemming from key speeches from Governor Graeme Wheeler and Assistant Governor John McDermott.

Governor Wheeler took the opportunity to remind economic analysts and the financial markets that his Policy Targets Agreement (PTA) does allow more flexibility to deviate away from the rigid 1% to 3% inflation target band for prolonged periods if the cause is temporary/transitory and not within the influence of monetary policy.

He also reminded the markets that the RBNZ’s inflation mandate is to set monetary conditions based on controlling future inflation in the 12 to 18 months’ time horizon. Monetary policy changes today cannot do anything to change historical inflation outcomes.

Therefore, Governor Wheeler was forced to reiterate that a record low 0.1% annual inflation rate for 2015 is not an automatic justification for more interest rate cuts below the current 2.50% OCR rate.

The question of where the OCR goes from 2.50% in 2016 is therefore not a clear cut down as many economists and market analysts have been pontificating about. The RBNZ are very well aware that the economy is growing at an annual clip above 3.00% with associated capacity utilisation, output gap and surveys of pricing expectations all indicating upward inflation pressures coming up.

The message from Assistant Governor McDermott at a speaking engagement in Sydney was that the RBNZ’s forward guidance for future 90-day interest rate direction is also not as rigid as the markets think. Like all forecasts of future financial market variables, the forecaster must always reserve the right to adjust the future track if there is a material change in current or expect economic conditions. It sounded like a response to the “no more OCR cuts” interpretation the markets placed on the 10 December 2015 Monetary Policy Statement.

I have no problem with the RBNZ taking the effort to remind everyone that the markets’ interpretation of monetary policy intentions or settings is sometimes off beam and not helpful to what the RBNZ is trying to do.

As long as the RBNZ messages that are delivered in between official statements are consistent and non-contradictory they play a useful role in correcting the tunnel vision some of the more bearish commentators seem to promote. The RBNZ are correctly concluding that they cannot ignore the robust trading conditions across the economy (dairy industry excepted), thus further interest rate cuts now seem less likely than before the explanatory RBNZ speeches.


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Roger J Kerr is a partner at PwC. He specialises in fixed interest securities and is a commentator on economics and markets. More commentary and useful information on fixed interest investing can be found at rogeradvice.com

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2 Comments

Governor Wheeler took the opportunity to remind economic analysts and the financial markets that his Policy Targets Agreement (PTA) does allow more flexibility to deviate away from the rigid 1% to 3% inflation target band for prolonged periods if the cause is temporary/transitory and not within the influence of monetary policy.

Was Finance Minister Bill English listening?

New Zealand central bank Governor Graeme Wheeler needs to get inflation back to target and some observers think he has “plenty of room” to cut interest rates, Finance Minister Bill English said.

“He’s been out of the zone for years now, below the midpoint for quite a long time,” English said in an interview late Thursday, referring to Wheeler’s 2 percent inflation goal. “He’s meant to be following the Policy Targets Agreement, that’s the bit I look at, and one day somebody will start asking the minister of finance questions about whether he’s actually following the agreement or not.” Read more

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Dear Roger,

I have been reading your pieces for some time now and they at least have the merit of consistency-that is-they are consistently Wrong. In your world,higher inflation is just round the corner and to counter that,interest rates should be going up,not down.
Well,apparently unnoticed by you,the world economy is looking a trifle shaky.Negative interest rates in Europe and Japan,sharply falling growth rates in China,problems across almost all commodity markets and a less than certain economic recovery in the US.
Of course,low interest rates help fuel asset bubbles in the share and property markets. Stockmarkets are now falling and i expect they have further to go,creating opportunities for long-term investors, but the property market needs more direct intervention.

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