The Reserve Bank (RBNZ) has announced that its chief economist Paul Conway will be making a keynote speech on January 30 that will address recent economic developments.
This is very significant as the speech will follow on closely from the latest inflation figures to be released on January 24 and will come well before the RBNZ's first scheduled set piece of the year, the Official Cash Rate review on February 28.
The context to this is the shock GDP announcement in mid-December, which showed that for the September quarter our economy shrank by 0.3%. This was hugely contra to the RBNZ's expectation that the economy would GROW by 0.3% during the same time.
But more than that, Statistics NZ revised earlier GDP figures as well and these revisions showed that, in fact, New Zealand had a 'technical recession' - two consecutive quarters of negative GDP growth - earlier in 2023.
The upshot is that the economy has been slowing far more than the RBNZ believed.
The markets have responded to this news by doubling down on the sentiment that interest rates will be cut sooner and harder, much more so, than the RBNZ has been forecasting.
Wholesale interest rate markets are currently pricing in a full 25 basis point cut to the OCR (presently at 5.5%) as soon as May this year. And those same markets are now pricing in a whole 100 basis points of cuts to the OCR by November 2024.
In contrast, the RBNZ's most recent forecast in its November Monetary Policy Statement was for the OCR to NOT BE CUT AT ALL until 2025.
Much will depend on next week's inflation figures, but the RBNZ is unlikely to be pleased with current OCR market pricing and it will not want to see further falls in retail mortgage and deposit rates - as we are already starting to see - until it is happy that inflation is and will remain under control.
The RBNZ's problem is that in recent years it has been having its last OCR review for the year in November - the last one in 2023 was November 29 - and then not having another OCR review till late February. It's a three month gap and means that if something significant happens in the meantime then the RBNZ may have to act to 'guide' market sentiment.
And that appears to be what's happening now.
This is the RBNZ's advisory of Paul Conway's forthcoming speech on January 30:
Chief Economist Paul Conway will deliver a keynote speech at 9am, Tuesday, 30 January 2024 via webinar, to be hosted on the RBNZ website. A link to the livestream will be added to the events calendar a few days before the speech is delivered. The text will also be published.
About the speech
The speech will focus on how significant changes to the global economy since the COVID-19 pandemic have created new uncertainties and challenges for monetary policy. High quality research and data will be needed to understand these changes.
Investing in data that is more frequent and more accurate is critical for informing policy decisions that have implications for future economic wellbeing and prosperity. High-quality data is also necessary for effective research. Our research agenda at the Reserve Bank is based on findings from our recent five-year Review of the Formulation and Implementation of Monetary Policy and the need to deliver on our monetary policy Remit objective of low and stable inflation.
In this speech, Mr Conway will also make brief comments on domestic data developments since the November Monetary Policy Statement.
It's the last paragraph above that's significant. Generally if the RBNZ is NOT making comments that might be market-moving then it will say so. The fact that the advisory explicitly says Conway WILL be commenting on developments is clearly intended to guide the market ahead of the February 28 OCR announcement.
The RBNZ will presumably need to address the question of the economy currently performing much worse than it expected - and what, if any changes this makes to its view of where interest rates should currently be sitting, and whether it now sees the possibility of earlier cuts to the OCR.
At this stage it would appear - depending on what the inflation result is like - that the RBNZ will hold the line and probably indicate it is NOT comfortable with the current market expectation of how soon there may be OCR cuts.
For sure, all eyes will be on that speech on January 30 as it gives us an early heads up to the RBNZ's thinking of where interest rates will be going - if anywhere - this year.
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