By David Hargreaves
New Reserve Bank Governor Adrian Orr has wasted no time stamping his own mark on the job, by stressing up front in his first major interest rates announcement that the balance of risk is equal that the next move could be up or down.
He said this while, as expected, leaving the Official Cash Rate at 1.75%.
Orr's immediate predecessor Grant Spencer had too highlighted that the risks up or down were quite balanced - but not in the upfront way Orr has, with it occupying the first sentence of his media statement releasing his first Monetary Policy Statement.
Orr also stressed that the OCR would stay at 1.75% for "some time".
One major change of course has been the introduction of an employment target into the Policy Targets Agreement signed by the Governor and the Minister of Finance. Therefore a reasonable amount of commentary in Orr's statement is devoted to this.
He notes that economic growth and employment in New Zealand remain robust, "near their sustainable levels". He goes on to note "an unprecedented increase in employment".
"The number of willing workers continues to rise, especially with more female and older workers choosing to participate. Likewise net immigration has added to the supply of labour, and the demand for goods, services, and accommodation."
While the order and emphasis of the first statement from Orr is quite different to what has come before, the underlying forecasts are not much different to those contained in the previous Monetary Policy Statement in February.
Inflation is forecast to reach the 2% midpoint of the RBNZ's targeted level by December 2020, versus September 2020 in the previous MPS. Likewise the forecast for OCR hikes has moved back a quarter, with the first (small) increase now slated for the September 2019 quarter as against June 2019 previously.
The market has clearly seen the Governor's first statement as at least very neutral - possibly even 'dovish' - and the Kiwi dollar has fallen as a result. It was above US69.8c before the statement came out and fell below US69.4c, which is a five-month low, after.
The MPS document commentary noted that growth in residential investment has softened over the past year.
"Activity in Canterbury has moderated, while elsewhere, growth in construction activity has been constrained by access to usable land and credit. Input costs for labour and materials have increased as well. Monthly consent issuance suggests growth in residential investment will be low over the next six months.
"KiwiBuild is assumed to generate additional activity from late 2019, although constraints may limit the increase in construction activity."
The MPS document said house price inflation had slowed since mid-2016. Demand for housing had been dampened by tighter credit conditions, partly due to tighter loan-to-value ratio (LVR) requirements, and higher mortgage rates.
"Investor demand has been notably softer.
"House price inflation is expected to remain relatively subdued, reflecting the decline in net immigration, affordability pressures, and government policy changes such as restrictions on foreign buyers. Consistent with this, consumption growth has eased in the past year and is expected to decline further."
ASB chief economist Nick Tuffley gave Orr a big thumbs up for his first statement, saying that Orr came into the role with the intention of bringing greater transparency to the RBNZ’s deliberations.
"He has made a mark through substantially changing the way in which the Monetary Policy Statement presents the RBNZ’s views.
"The overall message from the statement is very similar to the previous statements, even with the new Policy Targets Agreement. But the presentation is now being done in a way that makes the RBNZ’s messages much clearer and less vulnerable to misinterpretation.
"Importantly, the RBNZ’s thinking is going to be much more readily digestible by a broader range of people.
"We give Adrian Orr and the RBNZ plaudits for this change," Tuffley said.
This is the media statement:
Tena koutou, katoa, welcome all.
The Official Cash Rate (OCR) will remain at 1.75 percent for some time to come. The direction of our next move is equally balanced, up or down. Only time and events will tell.
Economic growth and employment in New Zealand remain robust, near their sustainable levels. However, consumer price inflation remains below the 2 percent mid-point of our target due, in part, to recent low food and import price inflation, and subdued wage pressures.
The recent growth in demand has been delivered by an unprecedented increase in employment. The number of willing workers continues to rise, especially with more female and older workers choosing to participate. Likewise net immigration has added to the supply of labour, and the demand for goods, services, and accommodation.
Ahead, global economic growth is forecast to continue supporting demand for New Zealand’s products and services. Global inflation pressures are expected to rise but remain contained.
At home, ongoing spending and investment, by both households and government, is expected to support economic growth and employment demand. Business investment should also increase due to emerging capacity constraints.
The emerging capacity constraints are projected to see New Zealand’s consumer price inflation gradually rise to our 2 percent annual target.
To best ensure this outcome, we expect to keep the OCR at this expansionary level for a considerable period of time. This is the best contribution we can make, at this moment, to maximising sustainable employment and maintaining low and stable inflation.
Our economic projections, assumptions, and key risks and uncertainties, are elaborated on fully in our Monetary Policy Statement.