By David Hargreaves
One of the more quaint 'guessing games' in the New Zealand economic landscape is coming to an end.
The Reserve Bank says from now on it will be giving an explicit forecast of what it in future expects the Official Cash Rate to be.
Up till now our central bank has in its Monetary Policy Statements issued estimates of where it sees the 90-day bank bill rates being in the future. But these estimates are of course based on what the RBNZ sees as the likely future level of the OCR, which the central bank itself sets.
All that's happened in the past is that bank economists and the like look at the projections of the 90-day rates and subtract around say 10-15 basis points to arrive at what the RBNZ is hinting the future OCR will be.
But no more. From next month's MPS all the cards will be on the table.
In an advisory informing of the change today, the RBNZ has issued the below graph, taken from the August MPS, which has had the official OCR projection added in.
It appears to indicate two things: One, that a drop of the OCR to a historic low of 1.75% on November 10 appears virtually 'locked in' and that two, the RBNZ appears to be forecasting a future level of about 1.6%.
In reality there will be no such thing as an OCR of 1.6%, so, the projection (which will be updated next month), shows that as of August the RBNZ was having a bob each way as to whether it saw the low point of interest rates in this cycle at 1.75% or at 1.5%.
More recent indications, courtesy of the strong performance of the New Zealand economy and some fledgling signs of emerging inflation, would suggest that come the November projections the RBNZ may well be signalling the new low of 1.75% as the bottom.
In explaining its new policy today the RBNZ said that historically the 90-day bank bill rate has provided a good gauge for the stance of monetary policy because it typically moves in a consistent manner with the OCR.
"Variations in the past have generally been temporary and experienced during periods of financial stress. More recently, regulatory changes in global financial markets have also been altering the relationship between the 90-day bank bill and OCR, complicating the Bank’s communication of the monetary policy outlook," the RBNZ said .
"The Bank views publishing a projection for the OCR as a more transparent way of presenting the expected policy actions needed to achieve its inflation target. It has no bearing on the way that the Bank conducts monetary policy. The publication of OCR projections as opposed to 90-day bank bill rate projections also brings the Bank into line with the practice of other central banks that publish expected policy paths."
The RBNZ said that as with previous 90-day rate forecasts, projections for the OCR are conditional on the central bank’s assessment of current economic conditions and assumptions about the future evolution of the New Zealand economy.