The Reserve Bank's doing the equivalent of the 'dance of the seven veils' by holding out the prospect of a future interest rate cut to keep the market "tantalised", ASB economists believe.
But there is a problem: "We are not good dancers," ASB chief economist Nick Tuffley says, in the bank's weekly economic newsletter.
"We would prefer a simple two-step shuffle of OCR cuts in June and August.
"It avoids tripping over errant veils.
"And the sooner interest rates get lower the sooner the RBNZ shores up a weak inflation outlook," Tuffley says.
The RBNZ "clearly" intends to cut the OCR again, in line with its March Monetary Policy Statement forecasts - but the timing is "quite up in the air", according to Tuffley.
"Back in October the RBNZ paused before duly delivering in December the final OCR cut forecast in the preceding September MPS. On the surface, the situation seems similar to now: one more cut signalled, a preference for delivering it at a MPS (with its detailed forecasts and commentary). But the October statement had a much clearer easing bias of “some further reduction in the OCR seems likely”, compared to last week’s “may be required”. That flags the risk the RBNZ waits beyond June."
Tuffley points out that, unusually, the June 9 MPS is followed directly by the August 11 MPS, as the RBNZ shifts to its new OCR release schedule.
"That gives the RBNZ two opportunities in a row to do thorough economic forecasts and make detailed explanations of its decisions.
"The August MPS would have the benefit of the latest GDP and CPI forecasts (as the previous schedule’s OCR Reviews had). In contrast, the June MPS has labour market (this week) and inflation expectations as the main economic releases – along with the NZD’s gyrations."
So Tuffley says it may be the RBNZ is doing the central banking equivalent of the dance of the seven veils, trying to keep the market tantalised with the prospect of an eventual OCR cut by keeping the OCR on hold while revealing one easing bias after another.
"By keeping the market on the edge of its seat, the RBNZ may hope to keep the NZD and interest rates constrained, wringing as much impact as it can out of what it sees as its last OCR cut for this cycle. It may also buy the RBNZ time to organise added home lending restrictions.
"If the RBNZ is thinking along these lines, it does feel a bit like a bull trying to shimmy around in a china shop. It is a fine line to walk.
"In the past the RBNZ has – presumably unintentionally – pushed the NZD higher with its December MPS and a February speech.
"Even the quite carefully worded statement last week still pushed up the NZD and interest rates more than it needed to, even allowing for the on-hold decision.
"The longer the RBNZ cries ‘cut’ without one appearing the more the market will doubt the RBNZ’s intention to follow through. The NZD and interest rates would likely creep up further, undermining the whole point," Tuffley says.