Reserve Bank Governor Adrian Orr says his decision to keep the Official Cash Rate (OCR) on hold at 1.75% was “the easiest decision I have had to make in 11 and a half years.”
But, speaking to media at the Reserve Bank on Thursday, Orr said “the hard part is what to do next.”
The kiwi dollar dropped after the OCR decision and the Monetary Policy Statement (MPS) were released, falling almost half a cent against the US to 69.3c.
The move was likely in response to Orr’s comments the next move in the OCR is “equally balanced, up or down.”
“Only time and events will tell,” Orr said in the OCR statement.
He was asked to elaborate further in his press conference.
“Yes, the door is open to a cut and a rate rise – that’s what we mean by balanced,” Orr said.
He said he the central bank went to considerable pains to outline that balance in the MPS document.
“A further reduction in the OCR, to return inflation to the target mid-point more quickly, risks creating unnecessary volatility in output, employment, and interest rates,” the MPS says.
But any OCR reductions would likely need to be reversed, as inflation pressures crept back up, it says.
A higher OCR, on the other hand, risks there being not enough demand to generate a sustained pick-up in inflation towards the target 2% mid-point.
“A longer period of low inflation risks inflation expectations falling and this becoming embedded in price-setting behaviour.”
But what could force the Reserve Bank to cut rates?
“The key risks to a rate cut would be international growth faltering, or more importantly, international financial market conditions tightening,” Orr said.
In other words, a rise in long-term interest rates, which could feed through into New Zealand lending rates.
At February’s MPS press conference, then Acting Governor Grant Spencer was also warning the next move to the OCR could be up or down.
Thursday’s statement was a much different style to that of previous Governors but has so far been welcomed by some economists.
“The defining feature of Adrian Orr’s first Monetary Policy Statement (MPS) is the clarity of the message,” BNZ Head of Research Stephen Toplis said.
“Instead of having to flounder through screeds of mumblings to find out what the Bank really thinks, the message is up front.”
ASB’s Chief Economist Nick Tuffley was also impressed by this approach, giving the Reserve Bank “top marks for the shift.”
No ‘relief’ at lower kiwi dollar
During the press conference, Orr was asked if he was “relieved” to see a lower kiwi dollar.
But Orr said relief was an emotion, and “I don’t have an emotion over currency.”
In a month, the New Zealand currency has dropped by 4.5c against the US dollar.
In terms of the central bank’s perspective on the matter, Orr said the drop in the kiwi reflected there being more sellers and buyers in the market at the previous price.
“That will be factored into what we have to do next time we boil up our monetary policy.”
As well as it being Orr’s first MPS, it was also the first time the new addition to the policy targets agreement was in play.
As well as maintaining price stability, the Reserve Bank now has to support “maximum levels of sustainable employment.”
Orr said the bank’s Head of Economics, John McDermott, has a “real challenge” around understanding what it is and how can the bank best contribute to it.
“We have gone out to New Zealand’s smartest economists and we will be talking about with the Labour market folk."
Orr fronts up to MPs
Speaking at the Finance and Expenditure Select Committee later on Thursday, Orr said it is his strong belief that the central bank can’t influence sustainable employment to any large degree.
But the Reserve Bank can contribute to maximising sustainable employment, he said.
When asked by National’s David Carter what contributes to maximum levels of sustainable employment, Orr said there are a number of factors.
“The level of employment, the employment rate, how many people are employed relative to the working age, the participation rate, unemployment rate, the underutilisation rate.”
Orr also took the opportunity to address critics of the central bank’s ability to control inflation.
“Our inflation target is 2% midpoint, 1% to 3% range.
“We have had very low and stable inflation and significant employment growth. [With] 1.5% core inflation, I believe has been an exceptional performance from this bank.”