By David Hargreaves
There's no doubt the folk working at the Reserve Bank must feel a bit like the mixture in a sausage making machine at the moment.
The pressure is on from all sides.
Perhaps never have the central bank's monetary policy and financial stability roles argued with each other as much as they are at the moment. This raises the possibility again in my mind that it might be a good idea to carry out a root-and-branch review of the Reserve Bank Act - which now seems overdue to me. We need to sort out more clearly exactly how the two main roles of the bank fit together - if indeed they do still fit well inside one organisatiion.
But looking at the right now, the RBNZ's in the midst of deciding whether to cut or hold interest rates next Thursday (28th).
The inflation figures released earlier this week were seen as being extremely significant in informing the RBNZ on its decision. In the event the result came in perhaps slightly in favour of a 'hold' verdict for the bank, since while the current inflation's still very low, there were signs of emerging pressures.
It's a live one
Certainly most economists, while agreeing that the OCR decision next week is still very much 'live,' seem to now feel that the RBNZ will be happy to sit on its hands.
Well, while having to accept that my record on this is not good - I didn't pick the first cut in this cycle in June of last year, nor the one last month (though not many did) - I'm going to disagree and say I think the RBNZ WILL cut next week.
One of the arguments against another immediate cut is the strong resurgence of house price pressures in the Auckland market coupled with continued strength in the regional markets.
The new tax rules introduced in October followed by new RBNZ restrictions focused on Auckland housing investors in November caused a pause in the Auckland market momentum that could have been missed if you blinked.
The March figures from Barfoot & Thompson, followed by those from QV, and then devastatingly so from the Real Estate Institute showed that not only had the RBNZ measures not dampened the Auckland flames, but that they had arguably helped to fan a previously non-existent fire in the rest of the country - by encouraging frustrated Auckland would-be investors to dip their toes into regional New Zealand housing.
No doubt that Reserve Bank Governor Graeme Wheeler would dearly love not to drop interest rates while the Auckland market's ablaze and the rest of the country's starting to distinctly smoke and flicker. But of course rising house prices - in the context that we are currently seeing them anyway (given the inflation pressures from the rising prices are at the moment fairly benign) - are a financial stability issue. And with the RBNZ seemingly coming under more heat from the Government to fulfill the monetary policy part of the deal - and get inflation somewhere back near the almost forgotten 1%-3% targeted band - using the OCR to lean against the housing market would not be viewed well.
But it's not an MPS...
One of the justifications given by economists for why the RBNZ will NOT cut next week is that it prefers to wait till the release of its Monetary Policy Statements. The next MPS comes with the following OCR decision in June.
But I wonder if the RBNZ feels it can wait that long in the face of the strength of the New Zealand dollar. At the time of writing the Kiwi currency was about 4% up on where the central bank was picking it to be in this quarter - and that's having revised its predictions sharply upward. The 70.9 pick on the Trade Weighted Index for the June quarter as at the March 2016 MPS was some 8.5% higher than the level of the Kiwi dollar expected by the RBNZ just six months earlier in its September 2015 MPS.
One trend that seems to have emerged from recent RBNZ releases - and one suspects it is a Wheeler initiative - is a seeming desire to really catch markets 'off-guard'. There's no question the March OCR cut did this, coming only weeks after Wheeler had given a speech effectively outlining reasons why he did not want to cut. The effect was that on the day the Kiwi dollar was really hit. Such a (surprise) strategy rather goes against the more traditional RBNZ approach of 'leading the market' ahead of time with nuanced, raised-eyebrow language, so that the market is already aligned with what the RBNZ's going to do before it does it.
This new approach, if that's what it is, has already caused some antagonism among economists and it seems to me to be a rather dangerous game. You need to believe what the central bank is telling you and don't want to feel it is in any way 'gaming' the market. I'm not saying it is doing that - but some of what we've seen recently has looked very close to that.
Okay, but then we go back to the rationale that says the RBNZ would be very wary of fanning the house market flames and that an April cut may be difficult to explain without an accompanying MPS. Good point. As is the point that the RBNZ's signalled 'bottom' for interest rates in this cycle is an OCR of 2% - and a cut in April gets us there. But I don't think it would be too hard for the RBNZ to drop rates to 2% and then signal potential for a further cut - given that many already think the low point will be below 2% anyway. For what it's worth I reckon we will see 1.5% by the end of the year.
Much has changed
There's perhaps another wild card in here too. Remember that courtesy of a Newshub MediaWorks leak - which saw news of the OCR cut in March communicated to some people ahead of the official release - the RBNZ has now torpedoed the long-standing practice of releasing information under embargo. This does mean that the ability to communicate the finer nuances of an OCR decision ahead of its release to the market has now gone. So, in my view the practical effectiveness of the MPS as an informational tool is reduced.
This means that the one page OCR announcement is going to mean exactly the same to a market participant at 9.01 in the morning as a full MPS statement does. The reason for the RBNZ to wait has therefore been diluted.
But what about the houses? Well, the fortunate thing for the RBNZ with this OCR review is that it's got the Financial Stability Report coming up on May 11, less than two weeks later. And, yes, I know, that's financial stability not monetary policy, but, see earlier in this piece about the difficult juggling act and the intertwining going on at the moment!
If the RBNZ is confident it has got its lines sorted out for the FSR announcement, I don't think it will have any problem cutting interest rates next week. I would further say that if we DO get an OCR cut next week then we can be reasonably confident that something fairly substantial aimed in the way of the housing market will be in that FSR. It's probably too early yet for a definitive proposal, but I would expect to see a fairly clear signposting of the next step and which part of the 'macro-prudential toolkit' the RBNZ intends to dip into - or indeed, whether there may be something new.
That's the logic, anyway. A cut next week and the foreshadowing of new housing-aimed financial measures less than two weeks later.
Anything less decisive than that would suggest a central bank that's really struggling to get to grips at the moment with the twin and conflicting monetary and financial stability roles. Action is needed yesterday.