Roger J Kerr points out his forecasts have been better than the gloomsters, and the RBNZ will now be 'forced' to upgrade

 By Roger J Kerr

RBNZ Governor, Graeme Wheeler has probably already approved the text of this Thursday’s Monetary Policy Statement and written his introduction and media release, however he would have been challenged as to what tone to deliver and thus what signals to give to the financial markets.

“Forward guidance” is the new buzz word in international central bank/monetary management circles, however the RBNZ has been outlining future scenarios and their reactions to events as they unfold in the future for many years now.

The RBA in Australia likes to surprise the moneymarkets with its monetary policy decision-making in some warped display of an ego-driven power play.

Here in New Zealand the RBNZ likes to confirm or subtly hint that current interest rate market pricing is in line (or not) with their forward look on growth and inflation.

In the US, the contenders to replace Federal Reserve Governor Ben Bernanke are reported as having differing approaches to forward guidance, no surprises and relationships with the financial markets.

Front runner and current Fed deputy Janet Yellen is seen in the Bernanke mould of signalling precise economic targets like the unemployment rate down to 6.5% before monetary policy can be adjusted.

On the other side, former Clinton-era Treasury Secretary, Larry Summers is viewed as being more “Greenspanesque” in approach and thus making decisions as economic events unfold rather than always mapping the future with multiple scenarios.

Larry Summers might be your preference in a crisis, whereas Ms Yellen is the better manager in a business as usual situation in the economy.

Governor Wheeler may desire a strategy for Thursday’s statement of not talking the NZ economy up too much as he needs the exchange rate to generally be lower when he is ultimately forced to increase the OCR in March 2014.

He does not want to been seen as responsible for pushing the currency higher now just as exporters are enjoying lower levels for hedging.

His problem is that all the latest economic data on the economy confirms a much stronger growth trajectory than envisaged by the RBNZ for this time. In their June statement the RBNZ forecast quarterly GDP increases from June 2013 to June 2014 of +0.4%, +0.6%, +0.9% and +1.0%.

Across the economy there are many indicators that suggest the September quarter will be nearer +1.0% with the June quarter still negatively impacted by the drought (dairy herds dried off early).

The latest ANZ quarterly Regional Growth survey certainly points to 1.0% quarterly expansion results for the economy.

Also, consider recent retail sales, construction, property market and dairy industry statistics and prices as all being very positive as well.

The economy has a positive momentum that cannot be ignored.

I have been accused in the past by some mainstream economists of being a habitual “Pollyanna” on the economy (biased to the positive or always overly optimistic).

Economic evidence over the past 12 months and looking forward to the next 12 months would see that optimism as fully justified and accurate to boot.

What this means is that stronger economic activity in 2013 produces higher inflation 12 to 18 months time i.e. towards the end of 2014. The RBNZ must be forced to increase both their GDP growth and inflation forecasts come Thursday.

Their current forecast of annual inflation of 1.5% in June 2014 looks disturbingly low when growth, oil price, construction cost and food price pressures are taken into account.

On top of that the RBNZ have assumed a currency Trade Weighted Index (TWI) of 77.5 for June and September 2013 and thus imported consumer good prices will not be as stable as they expect with the TWI 75.35 today.

Retailers are today not discounting prices with the benefit of currency gains in their pockets, as they were for most of the last two years when the NZD/USD rate was well above 0.8000.

The RBNZ need to revise their economic forecasts higher, however they will be worried about the market’s reaction to a more upbeat prognosis.

The interest rate markets will likely see Thursday’s monetary policy statement as the RBNZ merely catching up to recent market pricing.


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Roger J Kerr is a partner at PwC. He specialises in fixed interest securities and is a commentator on economics and markets. More commentary and useful information on fixed interest investing can be found at

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You have been saying things are on the up for 5years now? sure sooner or later you might be a stopped clock really.
My view is beware the eye of the storm....we've seen but one side of the GFC, the other side looks pretty close....

Really steven....  Really ! !
When I first read your comment I thought you were referring to yourself.  I suggest you not make comments about peoples inability to pick trends, glass houses and all that. 

Whomever is correct in the end , the pollyannish Roger or the Malthusian gloomster steven , the pertinent question is which one would you rather hang out with ?
... as one who enjoys Goldman Sach's well catered soirees , I know where I'd rather be , even if they don't always get it right ....

Quite right. Life is short - why not take the Gulfstream to Washington to ask for a bail out of your company?
(General Motors)

Actually that reminds me - I did attend a Goldman do on the South Bank - London in about 2005.
It was completely unclear what the party was for, but there were vodka fountains and brazilian dancers everywhere.

... my company is debt free ... and it isn't General Motors ...

Just maybe Mr Wheeler is mindful of things other than inflation; such as unemployment, the current account, and balancing of the economy from house swapping and asset selling/mortgaging to trading and production. He therefore may well try and keep the currency down, or hint at other tools; although Bill English still seems to have tied his hands to this mantra of inflation only, officially at least.

Certainly those are areas of concern that need addressing.  But do you really think RBNZ has the tools, expertise and democratic mandate to make the trade-offs that must be made to address them?   And if so - what do you think the Government should concern itself with?

Ms de Meanour,
You may regret asking, as I could write an essay.
I did respond to David's top 10 yesterday on the theme of inflation targeting, and a look at some of our data over the last 5 years, which generally has not been all that good, and reinforces in my view a distorted economy based on mortaging/selling assets, to fund more expenditure overseas than we are making. So we are more in debt, and have no long term wealth build up as a nation- apart from some genuine improvement in housing. Yet we still have higher than we would like unemployment, and considerable underemployment- albeit probably being absorbed by housebuilding now.
So between the government and the Reserve Bank we need to keep domestic consumption and therefore production up, to sustain employment. But doing so with totally free capital flows just lifts the exchange rate, forcing any increased consumption to go to offshore producers, thus having no employment benefits, and a worsening current account.
I would lean on/direct the commercial banks to source as much as they can internally, at least to the point of a balanced current account. Most certainly I would not have Treasury fund itself by any borrowing offshore. Nor any massive own goals like selling power companies to foreigners. Auckland City borrowing from Norway is nationally self defeating. The RBNZ/ Treasury should make up any difference against local funding costs, and insist the funds are sourced here.
If that process means there is too little funding here, (and I don't think our own velocity is anywhere too high yet), then print. 
Targets would be inflation, current account, employment, nominal GDP. 
The tools are as followed by nearly every other developed country.
Ms de M, I always value your views. By all means challenge these ideas.

What I was taking issue with was not the assertion that these things should be addressed, or even directly how they should be addressed - it was the apparent assumption that it is RBNZ's job to address them.   Regardless of whether or not they are sensible actions, some of the actions you propose above are not appropriate for the RBNZ to decide.
I wouldn't ask my plumber to decide whether to spend my money on loft insulation, a new car or reducing the mortgage, or for his advice on what kind of loft insulation, what car to buy or what sort of mortgage to take out, and neither would I ask him to do any of those jobs for me.  No amount of emphasising how important the decision is, or pointing out what an excellent plumber he is, will make it sensible or responsible for me to hand over to him the responsibility for a decision which he is not equipped to make. 

Ms de M,
Your issue or implied question is in my view a very important one, so it's a slight shame the article has already headed off into's archives.
What tools of government are best used to deal with unemployment, the current account, inflation, and nominal GDP growth (per capita or in total)? Then which branches of government are best placed to use those tools?
Bill English has played a form of pass the parcel by often seeming to imply that many of these things are outside his influence or control as Finance Minister, where his only interest is an Arkwright like attempt to balance the fiscal books. But in passing the parcel to Wheeler, he has formally stated the RBNZ can only address inflation and banking stability, even though in my view monetary policy can massively affect the current account, employment and nominal GDP, both through the availability of credit and very importantly, the exchange rate.
So English has passed the parcel (so as to absolve himself of responsibiltiy for the outcomes) but said to Wheeler, "sorry mate, you can't address many of the main issues, and by the way, you can only use the OCR on inflation". 
The following decisions would in my view sit well with the Reserve Bank.
In the event of a fiscal deficit- which is entirely up to the Finance Minister to produce- the RBNZ would in my view be best placed to decide whether to fund that deficit by borrowing, (and then domestically or offshore), potentially by selling assets (at least where the pretend justification for doing so is to have more government funds), or even by printing (which no sovereign should ever rule out). 
Similarly where the money supply was causing significant constraints on employment; the nature of expansion of the money supply would be best left to the RBNZ to manage. Commercial bank led, interest rate encouraged, offshore or domestic, or even printed would be up to the RBNZ. As with the Fed and the BOE, unemployment might be the easiest target. Get to an acceptabe level (something like a NAIRU) before inflation became again the preeminent target. A higher employment target would probably through cause or effect or correlation help the current account and nominal GDP.
There may be a case that some of these target and functions and tools might better sit with say Treasury, but they seem to ahve absolved themselves of them (and the Fed and BOE clearly have the targets, as an international benchmark.)
I have by the by been making these points directly or indirectly now for a couple of years on here. No-one has yet even half tried to debunk the points. I would actually welcome someone trying. (Matt Nolan got close but in my view didn't crack it). If there is a good and compelling case for an inflation only/ OCR only RBNZ then let's hear it. The rest of the world apart from Oz has moved on. I suspect Mr Wheeler would like the handuffs off as well.

I had to wonder if the talk of tapering off was a ploy to nudge the market while the fed got it's bets in.  I couldn't find anything (untainted) that indicated the kind of growth that matched those announcements,  thus was unfazed by the lower US growth than expected (and picked up a few pips on the offical news release)

New Zealands Real GNDI is currently 1.0 annualised , yet GDP annualised stands at 2.50%(staggering low given house /commodity price inflation ) , helped in large  by the statistical use of the implicit price deflator.
And do the retail bank managers @ ANZ really believe the citizens have the wherewithal to repay loans@ 15.95% p.a. that secure a return of lent capital this side of six years?

You carry on just as you are , Roger , we need a few pragmatic optimists around the Hickeysterical gloomster zone , to balance out the whiney whinging malcontents .....
... some of us do think that this is a wonderful country , with better governance now , ....  not perfect , but better .....