Last week, RBNZ Governor Alan Bollard announced he will not seek reappointment when his current term expires on the 25th of September. The change of Governor complicates the timing of interest rate moves and, at the margin, is one reason we now expect rate hikes will be delayed until December. This week’s labour market data will probably be a continuation of recent themes: unemployment is set to remain elevated and there is little upward pressure on wages.
Last week we pushed out our call on the start date for RBNZ rate hikes from September to December. With inflation pressure subdued, the previous week’s off the cuff comments by Governor Bollard that he is broadly comfortable with current market pricing for no hikes or cuts in the next year was an important development. Further supporting a later start date was last Monday’s announcement by Dr Bollard that he wouldn’t be seeking a third term as Governor in September. Although a rate hike at either the end of Dr Bollard’s tenure in September or the start of the new Governor’s reign in October aren’t impossible, they’re probably not ideal either. That said we do expect the delay to mean there will be some catching up to do in the early stages of the cycle – we expect an OCR of 3.25% by March next year.
The announcement of an impending change in Governor also ignited speculation in some quarters that the changeover might be used as an opportunity to make modifications to the RBNZ’s duties and/or structure. But in our view, a major change by September is very unlikely. Both the Prime Minister and the Minister of Finance have poured cold water on the notion. John Key commented that he was broadly comfortable with the current 1-3% target band, while Bill English remarked that he saw no reason to change the way interest rates were set from a single decision maker to a committee. But quite aside from the apparent lack of political support for any major changes, practical difficulties would make it very hard to push through any legislative changes as early as September. That’s not to rule out any changes all together, but anything that does happen is more likely to be in the first few years of the new Governor’s tenure.
While the focus over recent days has been on the man at the helm of the RBNZ, what really matters for the economy is not who is making the decisions but what those decisions are. In this regard it’s well recognised that no matter who that might be, the next move in the OCR will be up. Two factors critical to the timing of these interest rate hikes are the international outlook (in particular Europe’s debt problems) and reconstruction activity in Canterbury.
