With the economic situation looking particularly tricky, David Hargreaves wonders if the Reserve Bank needs to give itself more options as it mulls the final interest rate review of the year

A week is a long time in politics, so they say.

Well, seems like, at the moment, seven days is also plenty of time for much to change in the economy as well. 'Volatile conditions' as the market commentators like to describe it.

It is into this volatile mix that the Reserve Bank will soon be stepping again when it next reviews interest rates, on November 24.

There's going to be much to look out for in this review.

For a start it's the full-on review, complete with Monetary Policy Statement. That means we'll have an updated view of how the RBNZ is seeing New Zealand and the world and things economic.

We will also get the RBNZ's latest forecasts of the Official Cash Rate 'track' over the next three years. That's pretty much the first thing the economists will be looking at. 

The OCR forward 'track' is an odd thing when you think about it.

This is the RBNZ - which sets the OCR - 'forecasting' what the OCR will be in the months and years ahead.

The facetious might say, well you've told us what it's going to be, you don't need to make any more announcements.

But of course it ain't anything like as simple as that. In reality the OCR forecasts represent the RBNZ's best shot at what might happen in future based on the information it has on hand at the time the forecasts are prepared.

And the RBNZ folk can be as wrong as the next set of economists. For example the Monetary Policy Statement of March 2017 forecast that the OCR would be 2% in March 2020. It was actually 0.25% in March 2020. The RBNZ's forecasters 'missed' that the world was going to be plunged into a pandemic in 2020. In fairness, I think I missed that one too.

But notwithstanding whether the OCR forecasts prove to be accurate, we can be sure that economists will be poring over the detail of the next set in November's Monetary Policy Statement.

After the RBNZ took the axe to the OCR, cutting it to the aforementioned 0.25% in March last year (from 1%), the central bank didn't actually carry any OCR forecast in its MPS statements for over a year, not reintroducing the OCR track till the May 2021 MPS. The reason for this had been the pledge the bank made in March 2020 that the OCR would remain at 0.25% for at least 12 months. It did, having only been increased to 0.5% last month.

What the reintroduction of the OCR track in May of this year showed was how effective the OCR forecasts have become at leading market sentiment. That May OCR forecast was much more 'hawkish' than the 'market' had expected, so it led to a sharp upward revision in market expectations (and pricing for) future interest rate moves.

Mortgage rate rises by the banks have far outstripped moves of the OCR thus far. As mentioned, there's been just the one movement of the OCR, up to 0.5% last month.

In the meantime, with the wholesale interest rate markets having surged strongly upward on the inflationary sentiment, the banks have directly responded to this by pushing mortgage rates higher. And pretty quickly. The average two-year fixed mortgage rate - a popular option - has shot up from around 2.5% mid-year to 4% or thereabouts now.

So, the banks have actually been doing the RBNZ's work for it. They and not the RBNZ are leading the interest rates much higher, albeit that the RBNZ has 'cued' these moves by 'forecasting' aggressive future OCR moves.

The big questions for the RBNZ include the extent to which it keeps with an aggressive 'forward track' OCR forecast - and bearing in mind that bank economists are now seeing an ever higher high point for the OCR, with Westpac economists now picking a 3% peak.

And then beyond the raised eyebrow, wink, wink signalling to markets there's the question of what the RBNZ physically does with the OCR.

Given the very substantial rises already seen in wholesale and mortgage rate markets it might be argued that the RBNZ doesn't need to raise the OCR at the moment. But of course it doesn't quite work like that because the central bank has to at some point back up its future signalling. How strongly it does that just at the moment is the crucial point.

What makes the call for the RBNZ at this particular review so challenging is the fact that this is the last review for the year. It's then just short of three months before the next scheduled review on February 23.

In the some years now since the RBNZ changed its scheduling and introduced a very large summer break for OCR reviews I've been wearing big holes in the scratchy recording saying (largely to myself I think) that the summer break is too long if a particularly dynamic global economic scene is developing.

Well, as said at the beginning of this article, the global economic scene is super dynamic at the moment. And three months is going to be a long time for the RBNZ between OCR drinks.

Does it after all therefore anticipate the way things may go and raise the OCR by 50 basis points, so it has something 'in the bag' to hold matters through the summer? 

RBNZ Assistant (soon to be Deputy) Governor Christian Hawkesby recently very deliberately poured cold water on suggestions of 50 basis-point hikes. But this came after Hawkesby himself had earlier commented that had it not been for the Covid Delta outbreak in August the RBNZ could have considered a 50 point move in the OCR.

So would the RBNZ, with such a gap before the next OCR after all consider a 50 point move on November 24?

Or is there a better way?

I like the recent suggestion by ANZ economists of the RBNZ adding a January OCR review. 

I think given how volatile the current economic situation is this would be a very good idea and it should be considered.

The other option put forward in that ANZ piece is again for the RBNZ to turn up the temperature on its 'forward track' OCR forecasts. 

Could do, I guess, but it still leaves the markets stewing in their own juices over the three summer months.

There's a sense that the RBNZ is already well behind the eight ball with our economy and the way things (particularly inflation) have taken off. 

And I'm not sure that everybody clearing off for three months and leaving things under their own steam - bearing in mind the key driving places of the global economy including the US are NOT about to down tools for a summer break - is the way to have our economy heading in the right direction come the early months of next year.