Keep it simple

Last week’s Monetary Policy Statement (MPS) was more focused than usual on delivering a simple, unambiguous message to financial markets. However, the simplicity of that message belies the fact that the Reserve Bank is grappling with a growing number of complex, often conflicting, considerations for monetary policy.

As expected, the RBNZ left the cash rate unchanged at 3.50% and reiterated the neutral stance that it adopted in its January OCR review. The RBNZ sees “a period of stability in the OCR” as the most likely outcome, with any interest rate moves in the foreseeable future – whether up or down – being reliant on new information.

The notable part was how the RBNZ incorporated this message formally into its forecasts. The 90-day interest rate projection in the MPS was not only dead flat at current levels, it was deliberately cut off a year earlier than the other economic forecasts, ending at March 2017. Given the RBNZ’s forecasts of strong economic growth and rising home-grown inflation pressures over that time, it’s not hard to conclude that the additional year on the projections would have included an uptick in interest rates.

The reason for this truncated interest rate track seems to have been an unusually high level of discomfort about the outlook for the economy over that horizon. Given the risk that financial markets might make a meal out of a small and highly conditional rise in interest rates projected three years from now, the RBNZ avoided the issue by emphasising the bit it feels most strongly about – that the OCR is expected to remain unchanged over the next two years.