RBNZ Governor Wheeler speech was extremely balanced - ANZ

Cameron Bagrie, Chief Economist at ANZ, notes that this morning’s RBNZ speech (which the Bank’s website says was written by Governor Wheeler but delivered by Assistant Governor McDermott) was extremely balanced, in our view, endorsing current market pricing but no more.

Key Quotes

“This should put thoughts of 50bp cuts to bed, and at the margin, suggests the hurdle to a September cut is high.

• “Our present judgement is that the current interest rate track, involving an expected 35 basis points of further interest rate cuts, balances a number of risks weighing on the economy, while generating an increase in CPI inflation back towards the mid-point of the 1 to 3 percent target range.”
• “We remain committed to the inflation goals in the Policy Targets Agreement. We do not believe that the outlook and balance of risks warrants a position of no policy change, nor a position of rapid easings. If the emerging information and risks unfold in a manner that warrants a change in our judgements, we will modify our policy settings and outlook.”

Although the title of the speech gave little away (“Monetary policy challenges in turbulent times”), market chatter ahead of time speculated that some attempt would be made to talk down the TWI, or remind the market that the risks to the economy (and thus the OCR) remain skewed to the downside. There was no such talk, and consequently, the NZD spiked around 50bps higher immediately.

We regard the speech as a timely and practical exposé of the challenges and conundrums facing the RBNZ and other central banks of small, open economies. The post-GFC era has been characterised by unusually slow global growth, low inflation, structurally lower “neutral” interest rates, greater financial integration, and extremely high asset valuations. The Bank notes that many of these issues are likely to be long-lasting, and are beginning to stretch the design capabilities of monetary policy frameworks. We concur – too much is being asked of central banks, but that’s a story for later.

The final section discusses their choices. Briefly, these are to abandon inflation targeting (no!); not lower the OCR any further so as to not further fuel the already strong economy and housing market (no!); or ease rapidly (no!). The Bank concludes by saying that it will continue to take a balanced approach, is acutely aware of the trade-offs, and remains committed to inflation targeting.

We concur. Now is not the time to throw the baby out with the bath water (i.e. abandon inflation targeting, though it needs to be tweaked around the edges); nor is it time to chase the OCR to zero; nor is it time to do nothing and watch the TWI go to the moon. Balance is required, and we continue to expect a measured approach, with easings likely in November and February.”