It was subtle, but Thursday’s Official Cash Rate (OCR) statement contained what looks to be a get-out-of-jail free card for the incoming Reserve Bank Governor Adrian Orr.
Much of the statement was ho-hum, with the news the OCR will remain on hold for a “considerable period” eliciting practically no market reaction.
Economists were even joking about how boring the statement was, with ANZ Chief Economist Sharon Zollner Tweeting a picture of a heat rate monitor flatlining, with the caption “market reaction to RBNZ OCR Review today.”
But, according to BNZ Head of Research Stephen Toplis, there was more than meets the eye in the statement.
“We’re very conscious of the fact that there is a growing group of people who see inflation continuing to fall below the Reserve Bank’s target and they are starting to say ‘well hold on, if it’s below target… you need to lower interest rates.’”
He says at the margin; the central bank’s statement was giving a subtle signal that any talk of rate cuts “should be smothered.”
Acting Governor Grant Spencer fuelled speculation the Reserve Bank could cut rates at the Monetary Policy Statement (MPS) press conference last month.
When asked about the wording of the OCR statement that said …[monetary] policy may need to adjust accordingly,” and made no mention of specific up or down moves, Spencer said this was a “valid observation.”
“We have seen [inflation] surprise to the downside and if that continues, then it is possible that we can see interest rate reductions.”
Thursday’s OCR statement makes it clear that the Reserve Bank expects to see inflation dip further in the near term.
“[Consumer Price Index] CPI inflation is expected to weaken further in the near term due to softness in food and energy prices and adjustments to government charges.”
Toplis says: “With that in mind, the people who are banging the table and saying ‘you have to cut rates’ are only going to get noisier.”
Aiming to ease concerns
But he says the statement attempted to ease some of those concerns.
Although the Reserve Bank acknowledged inflation would fall, it also said it is expected to climb right back up.
It is a similar story with economic growth.
“GDP was weaker than expected in the fourth quarter, mainly due to weather effects on agricultural production,” the statement says.
But it then goes on to say: “Growth is expected to strengthen, supported by accommodative monetary policy, a high terms of trade, government spending and population growth.”
It also says labour market conditions are projected to tighten
“If you put all that together, it sort of disavows the view that New Zealand needs lower interest rates," Toplis says.
“[Spencer is] prepositioning in the event that those numbers do come out lower than expected to be able to say, 'we know that, we told you that' and it’s not a concern.”
This would get the central bank off the hook in the future, when the calls to lower the OCR to boost inflation inevitably get louder, he says.
“The last thing this economy needs at the moment is lower interest rates,” Toplis says, adding that this would put further pressure on the housing market.