By David Hargreaves
Damned if you do and damned if you don't, I suppose.
The Reserve Bank, having recently moved on from making some poor judgements in how it communicated interest rate moves to the market late last year and earlier this year, may just at this moment be regretting the transparency with which it has approached this Thursday's official call on interest rates.
Our central bank has, in it's inimitable raised-eyebrow manner, gone about as far as it ever would in communicating to us that interest rates, via the Official Cash Rate, will be moved to a new historic low of 1.75% on Thursday from the current 2%.
The marketplace is always very happy when the RBNZ gives reasonably clear signals ahead of time as to what it's thinking of doing. This avoids volatility and market participants 'misreading' the market.
There were some notable incidents toward the end of last year and early this year when the central bank made extremely unwise efforts to put a floor on the OCR.
Perhaps most infamously was last December when the RBNZ, as the market expected, cut the OCR to 2.5%. But, as the market didn't expect, our central bank then accompanied this cut with forecasts and a commentary that as good as said it was done with any more cuts. Which was and remains an extraordinary thing to have done under the prevailing market conditions.
So, after some similar misadventure earlier this year, our central bank has recently been 'good' - maintaining clear, consistent messages and pointing the market in the correct direction.
This being the case, I've personally got no problem at all with the way the RBNZ has signposted a cut this week. Sensible and practical in fact. But what I would say is, that the very fast-changing environment is NOW suggesting a cut this week is probably the WRONG thing to do.
Anything can happen
Last week's low (4.9%) unemployment figures pointed to an economy moving ahead nicely and with some capacity constraints possibly emerging. The RBNZ's own survey of inflation expectations, which it keenly watches, showed an uptick in inflation expectations. The US Presidential election could probably be best titled: 'Expect Anything'. And then what to make of the boo-boo Statistics New Zealand made with the September inflation figures?
I guess perspective is needed and at 0.4% the real/corrected annual inflation figure is very low against a virtually non-existent 0.2% under the old erroneous calculations.
However, it is worth considering that the original 'error' figure was in any case actually somewhat higher than economists had predicted. So the 'real' one will be quite a bit higher than expected.
Also, the non-tradeables annual inflation rate jumps from 2.1% in the incorrect version to 2.4%. Again quite a difference.
Mind your language
I'm not sure what the standard of spoken language is like inside the RBNZ offices, but I would have certainly forgiven them for coming out with a bit of fruity stuff when those new figures got dumped on them.
The RBNZ of course has to produce a new set of economic forecasts including, most importantly of all, new inflation forecasts in the Monetary Policy Statement to be issued in conjunction with the OCR review on Thursday.
It is going to be reasonably interesting, to say the least to see if: A/ It will have time to incorporate the revised CPI figures into its forecasts and B/ What it says about the likely impact of those changes.
I've had a sneaking feeling for a little while that inflation is going to start surprising on the upside.
Leave it alone
What the tea leaves are now seemingly telling us is that it would probably be best to leave the OCR right where it is just at the moment.
And I haven't even tried to quantify the impact of a Trump Presidency. That way madness lies.
The prime motivation behind a cut to 1.75% this week is the strength of the New Zealand dollar. Our currency has once again developed wings and flown above US73c.
If the RBNZ didn't cut this week then the Kiwi could be expected to fly still higher.
A murky picture
There are complications with this picture as well though.
One complication is very much of the RBNZ's own making. It has changed the timetable for OCR decisions. There used to always be an OCR call in December. Now, this year, the OCR review this week will be the last till February 9 - basically three whole months. A LOT is likely to happen in that time. Maybe the RBNZ is now having some room for regret on that decision as well.
And another complication is that for the first time in this Monetary Policy Statement the RBNZ will start giving us its explicit forecast of where it sees the OCR being set in future as part of the economic forecasts over the next couple of years.
It's a sensible move. Previously the RBNZ gave estimates of where it saw the 90-day bank bill rate heading. But this of course was effectively a bit of a sleight of hand, guessing game, since the bill rates are largely based on the OCR, the level of which is set...by the Reserve Bank.
No more guessing
So, now the guessing game's gone. But it does now pose a different challenge for the RBNZ. If we assume that the planned cut to 1.75% by the RBNZ this week was seen as likely its last for the foreseeable future, would it tell us that? Do we look at projections of the OCR for the next year and see '1.75%'. If that's the case, then the dollar will likely go up for sure and the effect of the cut will be completely nullified, much in the same way as it was in December last year when a cut was accompanied by very positive, hawkish, commentary indicating no more cuts.
The upshot is don't make an OCR cut and the dollar will go up - but very possibly it will go up in any case, particulary given the constraints of the new requirement to predict the OCR level directly.
So, dilemmas all round.
Hold fire after all?
With everything else that's going on, is it just possible the RBNZ may yet hold fire on a rate cut this week and leave itself some leeway for future OCR decisions?
It would be a brave move and the central bank would cop it in the neck from the market place given that it would be a complete U-turn on the way the RBNZ has led the market.
But, do you know, it just might be the right thing to do.