Dominick Stephens
Auckland, July 1, 2018
The Reserve Bank reiterated that the OCR is expected to remain low, but gave no guidance about the timing or direction of the next move.
Overall, this Review sounded slightly more dovish than previous RBNZ communications.
The RBNZ’s communication style is shifting towards emphasising uncertainty.
The RBNZ is becoming less bullish about economic growth.
We were surprised that the RBNZ shifted its view on that today.
In the bigger picture, the RBNZ’s forecasts and financial market pricing are converging on our long-held views.
The economy will be mixed in 2018, and the OCR will not need to rise until November 2019.
The RBNZ assessed the Government’s May Budget as less stimulatory for the economy than previous forecasts. We disagree with that.
The only thing about the future that economists can really be sure of is that their forecasts will be wrong – some unexpected event or “flapping of a butterfly’s wings” will inevitably have unanticipatable consequences.
Emphasising uncertainty
The Reserve Bank really ran with that in today’s OCR Review, strongly emphasising the uncertainty about the OCR outlook and offering nothing in the way of guidance about the timing or direction of the next move.
The RBNZ simply stated that the OCR would remain at 1.75% for now, and could move either direction, at any time, as necessary.
However, it did later say that the OCR would remain at an expansionary level for a considerable period. We regard this shift to agnosticism mainly as a reflection of the new Governor’s communication style.
It is not, in and of itself, a sign that the RBNZ thinks the inflation outlook has changed.
That said, the details beneath the headline of today’s OCR Review were slightly more dovish than we anticipated.
Lowered assessment
The RBNZ pointed to weaker domestic economic data and global trade tensions, and, surprisingly, said that they regarded the outlook for fiscal policy as less stimulatory than before. Together, this implies that the RBNZ has lowered its assessment of medium-term inflationary pressures.
Markets, however, did not react to the Review, perhaps because interest rates had already fallen on yesterday’s weak business confidence numbers.
Both the Reserve Bank and financial markets are slowly coming around to our long-held view that 2018 will be a slow year for the New Zealand economy, not one of accelerating growth. Consequently, there has been a convergence of opinion about the OCR outlook – neither financial market pricing nor the RBNZ’s forecasts are significantly different to our long-held forecast that the next move in the OCR will be a hike in November 2019.
Note on OCR
The RBNZ’s guidance paragraph was: “The Official Cash Rate (OCR) will remain at 1.75% for now. However, we are well positioned to manage change in either direction – up or down – as necessary.”
Three features of that paragraph stood out: (1) The RBNZ said the OCR would remain at 1.75 percent “for now,” whereas previously it had said “for some time to come” or “for a considerable period.”
This emphasises that the RBNZ is uncertain about when the OCR might move, rather than signalling an imminent move. (2) The RBNZ retained the phrase “up or down.” Financial markets had latched onto those three words and removing them would have been interpreted as a sign that the RBNZ is readying to increase the OCR. The RBNZ wisely avoided sending such a signal.
(3) Other than “up or down,” the phraseology of the guidance paragraph was different to the May MPS paragraph.
This was expected. The RBNZ is trying to avoid the formulaic communications.
It wants markets to read each statement individually, rather than making side-by-side comparisons between the exact wording of two statements.
The RBNZ finished with “The best contribution we can make to maximising sustainable employment, and maintaining low and stable inflation, is to ensure the OCR is at an expansionary level for a considerable period.” Again, the words were different to the corresponding paragraph from May, but the meaning was the same.
The Bank’s Guidance
The RBNZ’s guidance paragraph was: “The Official Cash Rate (OCR) will remain at 1.75% for now. However, we are well positioned to manage change in either direction – up or down – as necessary.” Three features of that paragraph stood out: (1) The RBNZ said the OCR would remain at 1.75% “for now,” whereas previously it had said “for some time to come” or “for a considerable period.” This emphasises that the RBNZ is uncertain about when the OCR might move, rather than signalling an imminent move. (2) The RBNZ retained the phrase “up or down.” Financial markets had latched onto those three words and removing them would have been interpreted as a sign that the RBNZ is readying to increase the OCR. The RBNZ wisely avoided sending such a signal. (3) Other than “up or down”, the phraseology of the guidance paragraph was different to the May MPS paragraph.
This was expected.
The RBNZ is trying to avoid the formulaic communications.
It wants markets to read each statement individually, rather than making side-by-side comparisons between the exact wording of two statements.
The RBNZ finished with “The best contribution we can make to maximising sustainable employment, and maintaining low and stable inflation, is to ensure the OCR is at an expansionary level for a considerable period.”
Again, the words were different to the corresponding paragraph from May, but the meaning was the same.
Dominick Stephens is the Chief Economist at Westpac based in Auckland.
