An Australian-based bank economist is questioning the usefulness of the Reserve Bank's 'forward guidance' of the future expected level of the Official Cash Rate (OCR).
Ahead of the RBNZ's latest review of the OCR on Wednesday (August 14), HSBC chief economist, Australia, NZ & Global Commodities Paul Bloxham said the central bank's "forward guidance strategy" is in focus.
"The guidance the RBNZ gave in May 2024 was that a near-term hike [of the OCR] was more likely than a cut, and that rate cuts were not expected until Q3 2025. This was a substantial hawkish tilt at the time and was delivered despite the RBNZ's own forecasts for inflation to gradually fall and the unemployment rate to rise," Bloxham said.
A key role that forward guidance is supposed to play is to inform central bank observers about the "reaction function" of the central bank, he said.
"That is, it is supposed to show how the central bank thinks it would respond to certain economic outcomes. For example, if inflation falls by a certain amount and the unemployment rate rises by some amount, what the central bank is likely to do with its policy rate in response."
It could be that the forward guidance in May "was not a genuine reflection of the central bank's reaction function. If so, a much closer examination of the usefulness of forward guidance should be considered," Bloxham said.
"...A key upshot for us is that, at this stage, it appears that the forward guidance in May increased, rather than decreased, the uncertainty about the RBNZ's reaction function."
The event Bloxham refers to is the RBNZ's May 22 OCR review and Monetary Policy Statement (MPS), which saw the RBNZ's shock 'hawkish' turn in which it gave a greater than 50% chance of the OCR (currently at 5.5%) being hiked again, while cuts were seen as being well over a year away.
This was, however, in fairly short order followed in the next review in July by a 'dovish pivot' in which the RBNZ made clear that OCR falls were very much coming into focus.
Since then the wholesale interest rate markets have been 'pricing in' more and more OCR cuts.
Bloxham said for the RBNZ, the challenge at the moment is how vastly different its forward guidance in May has been from market expectations, both now and at that time.
"Adding to this challenge, some of the key economic data that the central bank forecasts - the CPI and unemployment rate - have turned out largely as the RBNZ had expected, but the RBNZ's own projections for the cash rate are still a very long way from market pricing."
Bloxham said it could be that market pricing "is too aggressively dovish".
"Perhaps the forward guidance will prove to be a genuine reflection of the central bank's reaction function.
"However, even if this is the case, and the cash rate is held steady this week, it seems likely that cuts are coming much sooner than Q3 2025 and we expect adjustments to the RBNZ's projections to reflect this on Wednesday."
Bloxham said HSBC's "central case" is that the RBNZ will remain on hold this week, with cuts beginning in the December quarter 2024.
"But given all the uncertainty, we see this week's decision as a close call. Whatever happens, Wednesday's RBNZ announcement is set to be action-packed."
Elsewhere there are plenty of differing views about what might happen in the OCR review.
The nine-strong 'Shadow Board' of economists, academics and business leaders that the New Zealand Institute of Economic Research gets together to offer views of what will happen in OCR reviews is "divided" ahead of this week's review, according to the NZIER.
"Over half of the Shadow Board members viewed that a 25 basis-point decrease in the OCR is needed now, given the continued slowing in the New Zealand economy and the labour market, and annual CPI inflation is nearing the 1% to 3% inflation target band. The rest of the members recommended the Reserve Bank keep the OCR at 5.5%. One member considered that there is still not enough evidence from the economic data indicators to justify a cut in the OCR now," NZIER senior economist Ting Huang said.
And ASB economists have joined economists at BNZ and Kiwibank to make three out of the big five banks calling for an OCR cut this week.
In ASB's Economic Weekly, ASB chief economist Nick Tuffley, calling for a 25-basis-point (bps) cut this week, said the RBNZ's biggest room for regret "has quickly moved to holding interest rates too high for too long, with long-held concerns about easing too soon fading rapidly".
Tuffley said even an orderly string of 25bps cuts starting this week would still take until late 2025 until the OCR gets back around a "neutral" level.
"That is an extremely long time for monetary conditions to remain restrictive – a year after inflation has got into the target band," he said."The longer the RBNZ waits to cut the OCR, the more risk it finds itself having to cut by much larger amounts, which would also give ammunition to critics of how monetary policy has been conducted in recent years.
"And with market pricing serving up a rate cut on a platter, the RBNZ will now risk considerable market volatility by choosing to keep interest rates on hold," Tuffley said. But he said whether there's a cut or no cut, the RBNZ is very likely to temper markets over enthusiasm for pricing in OCR cuts – currently more than 125bp over the next four OCR announcements.
"An on-hold decision will push interest rates up irrespective, the mildness or otherwise will depend on how close the RBNZ signals it is to cutting.
"But even if the RBNZ cuts, it is unlikely to give a green light for the extent of cuts built in. The RBNZ is likely to signal a data-dependent pace as we step into NZ’s first easing cycle after all the Covid-triggered upheaval of our economy, household behaviour and priorities. How we all react, and how well inflation behaves, has yet to be revealed."
33 Comments
I cannot remember the Economics community quite so uppity about RBNZ / Communications / Guidance / Data
We're at the point where everyone has nothing else but talking up their own interests.
Bloxo used to be a media darling back in his 'Aussie/NZ rock as economic rock stars' period. Just another salesman/influencer for his bankster overlords.
I feel like a lot of this mess is because they had to fudge the output gap in their macroeconomic forecasting model in an attempt to reconcile the wedge that was forming between their growth and inflation estimates - i.e. the low growth/sticky inflation results we've been seeing. I assume that after this fudge the model spat out the hawkish OCR track we got in the May MPS. The simpler explanation is probably just that this model isn't doing a good job of capturing the inflationary dynamics in the economy at the moment (rates, rents, premiums etc.) They published a bunch of papers on these dynamics but it's hard to roll those results into a policy making model in such a short timeframe, so we're left with this confused middle ground. It's not like they're going to come out and say 'we don't trust our forecasting tools' explicitly, but that's what their policy decisions are beginning to imply.
I don't think RBNZ could forecast the date for Christmas but I do thing the market is probably a bit too Dovish on near-term cuts. Inflation over the last three quarters is exactly where RBNZ wants it, they are unlikely to alter policy setting while they are around the 2% mid-point.
"... no one knows on which date Jesus was actually born (some scholars believe that the actual date was in the early spring, placing it closer to Easter, the holiday commemorating his Resurrection)". But I guess we all believe in the Santa Clause that is supposed to deliver presents on a specified day. So perhaps Adrian has more in common with Santa than just his appearance!
I see the Aussie are having a similar discussion over there:
"Beware of economic 'false prophets', warns Reserve Bank... Of course, eye-catching language sells newspapers, secures clients and draws crowds to the soapbox," Reserve Bank of Australia's Deputy Governor said on Monday. "But when the stakes are so high, claiming supreme confidence or certainty over what is an intrinsically uncertain and ambiguous outlook is a dangerous game"
https://nz.finance.yahoo.com/news/beware-economic-false-prophets-warns-…
Let's be clear here.
The May 'guidance' that rates wouldn't come down until Q3 2025 was utter, unadulterated b.s.
The RBNZ had absolutely no data nor historical grounds to base such b.s. on. None whatsoever.
I feel for those poor people that heeded this rubbish from the RBNZ and fixed long because of it.
The RBNZ should be paying the break fees of any person that fixed long based on their b.s.
Don't tempt them to hold rates higher for far longer because they once said that's what they were going to do. That's what happened with the LSAP and FLP, everyone told them to turn it off early, but because they said once it will be open for a while, they kept it open for waaay longer than they should, throwing fuel onto the bomb fire on onside, water onto the other side (with interest rate rises) and wondering while the fire is still going. Then banks made mega profits and prideful Orr was forced to send angry letters as they gouged NZ consumers to high heaven.
And all those FHB's who decided to buy on his "low rates are for the foreseeable future" comment...and before the cries of "they should have done their own economic research" or "only an idiot would believe that rates would stay that low", I agree, but if I have a leak in my house I call a plumber and trust his advice as a professional...and the everyday kiwi should be able to have faith and trust in the guidance of our reserve bank governor...hey, I get that he's just doing his job to the mandate given to them, and I also get that people are responsible for their own actions but jeez if it works out that he's either jawboning way too aggressively, or simply incompetent at analysing the info, then either way it is fair to say that he's done a fair bit of damage has our ole mate Tane Mahuta.
Exciting 12-24 months ahead eh...maybe the path looks like no cut, then small cut, then f**k me what have I done cut, then oh sh*t I've really fumbled the cookie on this one slashing.
The only people I remember telling us that "low rates are for the foreseeable future" were the banks and the property industry.
The best thing we can do for FHB's is to keep rates high so they receive interest on their savings and are encouraged to save for a higher deposit on the premise that house inflation is flat or negative and that they may have to borrow less.
"We have no intention of raising interest rates. Our task now and for the foreseeable future is; get them down, keep them down."
Ummm…maybe your memory isn’t super good then 🤷🏻♂️
Thats a quote from the big dog Tane Mahuta himself from a 2020 interview…did people make poor decisions? Yep, they definitely did…did they get let down from someone in a position of authority that they should be able to trust…yep, they definitely did.
Yep, but “hindsight” isn’t a great answer when you’re in his role…“with hindsight” might work when explaining to the missus that I shouldn’t have had that last beer at the pub making me late home…not when running a central bank 😂.
The scary thing is…in a couple of years time there is a decent chance people will say with “hindsight” the lagging inflation wasn’t demand pull and the damage to our economy and the people out of employment caused by leaving rates too contractionary for too long wasn’t his fault also 😬🤦🏻♂️
Again, did people make poor decisions…yep they did. Did people also get let down by Adrian, yep they did.
Not likely. Govt would have less interest to pay on debt (subject to its type, when issued, etc.)
Currently, govt revenues are low and falling because the RBNZ has purposely engineered a very, very, very long period of either near zero or negative growth. When it will end is anyone's guess. When we look back, we'll call these the 'lost years' as NZ Inc went almost nowhere, or backwards.
NEO-CLASSICAL ECONOMICS AND BARE FACED LIES
Why on earth would we listen to anyone talking up his employer's book, when they are employed by one of the most evil banking institutions in the entire history of humanity?
Poet Lawrence Ferlinghetti asked… “whether man must burn down his house to roast his pig…”
When he asked this question I'm not sure if he had monetary policy in mind, but the current Western neo-classical monetary policy used to tackle inflation is precisely that scenario.
Worse still, history illustrates that interest rate hikes have to be so utterly brutal that they need to be at the very least at the level of the true inflation rate, or higher – Paul Volker did this in the 1980s when the rates were pushed above 20%.
This is made worse by the fact that an economy can have inflation and deflation at the same time - IOW, severe inflation for essential inputs that keep the productive economy going, and for our society and families to even survive, but offset and masked by deflation in of the many non-essentials.
Volker's strategy was spun at the time as successful from the point of view that it appeared to halt inflation when all it had done was destroy enough of the real economy and liquidity to make it appear successful.
In 1979 the federal funds rate had averaged 11.2% and Volker took them to a peak of 20% in March 1980. The prime rate topped out at 21.5% in 1981, which heralded (surprise, surprise - NOT) a rise in unemployment to over 10% and the 1980-1982 depression.
“Volcker’s Federal Reserve board elicited the strongest political attacks and most widespread protests in the history of the Federal Reserve (unlike any protests experienced since 1922), due to the effects of high-interest rates on the construction, farming, and industrial sectors, culminating in indebted farmers driving their tractors into Washington, D.C. and blockading the Eccles Building. US monetary policy eased in 1982, helping lead to a resumption of economic growth.”… Wiki quote.
Although I am a great admirer of Ron Paul – IMO the quote below reveals that even he was not aware of the utter falsehood of attempting to use rate hikes as a constructive monetary tool to address inflation.
“Being in Congress in the late 1970s and early 1980s and serving on the House Banking Committee, I met and got to question several Federal Reserve chairmen: Arthur Burns, G. William Miller, and Paul Volcker. Of the three, I had the most interaction with Volcker. He was more personable and smarter than the others, including the more recent board chairmen Alan Greenspan and Ben Bernanke.”
Volcker may well have been the smartest, but in my opinion, they all wreaked havoc on Mainstreet, and massively rewarded the financial economy at the expense of families, SMEs, and the productive economy.
As Volcker aged, he became more critical of the banking industry but that was long after he had spent his career indulging and implementing most of the destructive hoaxes of neo-classical eCONomics.
Interest rate hikes are not an effective monetary tool to address inflation – on the contrary, they instantly feed inflation just as hikes in energy prices do – you do not even require the most basic economic nouse to understand this principle – it should be self-evident to anyone with an IQ even approaching room temperature.
As Werner points out, it is not interest rates, but bank credit that determines economic growth, simply because ~97% of the money supply in our Western fiat currencies is created out of thin air by privately owned commercial banks.
There is zero basis for the official narrative that higher interest rates lead to lower growth and that low interest rates lead to high growth.
As with most aspects of eCONomics, the quickest way to get straight to the truth is to simply assume the 180˚ polar opposite of the official narratives. All of the empirical evidence demonstrates that interest rates are a lagging indicator and a farcically ineffective monetary tool”
Karl Popper called this the ‘immunising stratagem’ which scientists fancied could guard their theories from being challenged by the use of reverse engineering in what became known as the ‘deductive approach.’ This is my interpretation of the process…
- Predetermine a conclusion that supports the banking cartels’ grand theft from Mainstreet
- Invent a model that can give you that contrived conclusion
- Identify the false maxims that can propagate the lie and present them as facts
- Present these steps in the reverse order
- The network that has the key to the giant printing press then buys up all of the networks and agencies required to manufacture the narrative, even when it is nothing more than a bunch of myths premised on deliberate lies
Safe Havens in times of financial strife – where are they now?
In the 1980s the level of total debt was so much less than it is now that the entire financial meltdown was at a totally different level. Today just the U$ Govt debt alone is a death spiral in itself, with an extra $1 trillion added every 100 days. It took almost 200 years for the U$ to accumulate $1 trillion in public debt - now it takes a mere 100 days.
In 2024 the U$ will have to issue $10 Trillion in Treasury paper to finance more deficits and to roll over old paper at much higher interest rates. The revised cost of this debt will rise from ~$1 Trillion to $1.5 Trillion. This is a debt spiral where more and more money has to be borrowed just to pay the interest back – paying down debt is not even on the radar. They are technically insolvent just as 90% of Western countries are.
NZ is technically insolvent too - our total debt (including unfunded liabilities) is a higher percentage of GDP than that of Greece, which most assume is the archetypical economic cot case on planet Earth. Our figure at over 600% is more than 1200% higher than our public debt, but not a single financial commentator (apart from YT) ventures anywhere near this extremely uncomfortable reality.
Meanwhile, we continue to eviscerate the real economy and families, whilst we reward the parasitic financial economy with billions - because we allow them to create the money supply that we should be creating as a public utility for the good of society and the domestic economy.
All of the big 5 Western fiat currencies have this problem including the three sometimes referred to as ‘default currencies’ – the dollar, the Yen, and the Swiss Franc – these used to be seen as safe havens to hide when the financial/geopolitical shite hit the fan.
Now none of these are safe any longer, and so the pressure will really come onto these currencies as there are now viable alternatives that countries can use in their accelerating de-dollarisation and fiat exiting strategies – these include…
- Gold stacking by central banks — this is at an all-time historical high at around 1000 tons per annum for the last few years – this is a no-brainer, especially now that Gold is a first-tier asset under the new Basel III regulations – this facilitates the process, out of plain sight.
- Silver – although not monetized like gold under the new international banking regulations, at a 90:1 valuation compared to gold at a historical average ratio of ~16:1 this has to render silver the most undervalued commodity on the planet – silver makes for a fascinating story given that it is both a monetary and industrial commodity and the fact that 85% is mined as a by-product of other PMs. Silver is the absolute wildcard when the big reveal of the Western fiat currencies commences – at 16:1 with gold at $2,500 oz that would put silver at $156, with gold at $3,000 – silver would be at $187, gold at $5,000 – $312, and at $10,000 – $624! Another way of looking at it is that silver has basically been demonetised since 1873, and if it reverted back to its primary historical value as a monetary metal, then it would be around 1/10 of the value of gold per oz, which with gold at $2400 per oz, that would price silver at $240. IOW two entirely different methods render a similar result.
- Any and all commodities that are needed in the future
To me, the Western safe havens no longer exist, as the main Western fiat currency economies now face a very unpleasant binary choice between either…
A. Severe hyper-inflationary depression and ruin or
B. Severe and extended debt liquidating depression - and ruin.Until these Western fiat currencies and economies crash and burn there will be no reform any more meaningful than rearranging the deck chairs on the Titanic. The inevitable will be delayed for a few months because governments can still sell relatively liquid short-duration treasury bills, but long-dated paper will become more and more difficult to sell - given that all of these main Western fiat economies/currencies rely on selling their debt in the form of bonds, this is a disaster waiting to happen.
As debt becomes more and more risky and toxic, how are we going to see interest rates lowering to the extent these eCONomists are salivating over? Papering over these debt levels will only make matters worse and the compounding interest effects on multiple countries will only bring home the stark reality of a hyperinflationary depression or severe stagflation.
To me, everything about the tone of this article reeks of the mythology of eCONomics. Until as a country, we learn the stark difference between the parasitic financial economy and the real economy, plus implement massive monetary and fiscal reform, we will have zero means of escape from a debt death trap cynically laid by the global robber barons.
Once upon a time, the largest part of HSBCs business was the opium trade - not a lot has changed, except in this day and age it is mostly based on hopium and perpetuating the outrageous mythology and bare-faced lies of neoclassical eCONomics.
https://globalsouth.co/2024/03/12/economics-part-iv-interest-rates-mani…
Colin Maxwell
The die is already cast - a tragic global financial meltdown is mathematically inevitable, with Mad Max scenarios likely to be commonplace in many countries.
The massive BRICS+ initiatives will provide the inspiration and the safety net for the RoW to join a new cooperative, financial/social/defence paradigm that is neither predatory nor cynical. The fact that two of the leading members already deploy public utility banking models and are creditor nations with robust balance sheets should make us all sit up and take notice.
All we can do is begin the conversation so that when it hits us we at least have some understanding of what is going on and how we can remedy the situation.
Both NZ (in the 1930s), Aus (1912-post WW2), and Canada (1930s-1970s) along with many other countries deployed public banking solutions with huge success but then surrendered these models back to the robber barons.
We don't need to reinvent the wheel - the world is full of proven successful models - what we need to learn is how to hold onto them so that society can benefit and build long-term sustainable wealth and stability.
In desperation, I wrote a-based solutions 6-part sequel on this tragic theft but of course, no mainstream news source will go anywhere near any article that seriously challenges the neoclassical tripe that we read on a daily basis.
'Our' so-called 'think tanks' like NZ Initiative have let us down badly too - even their name is farcially hypocritical.
When I wrote to them challenging the status quo narratives, they informed me that they don't bother with theories like mine that are too far from the mainstream narrative - just as they don't deviate from climate catastrophist 'thinking' either.
For what it's worth my sequel is aired on a very active geopolitical site located in Costa Rica...
The wealthy have large financial knowledge of, and vested interests in, the current status quo. They will never allow, to the best of their ability, information to come to the public forums that could change public discourse away from what benefits them so much , despite o they have enough wealth already to weather the storm when the house of cards all falls down. This is precisely why many substances were outlawed in the USA and pushed to be outlawed across the western world, as they spurred the hippy movement which saw the rising view that the Vietnam war was a waste of time and money.
There is another threat to fiat currencies that few in MSM have addressed: crypto.
Like other stores of value like gold, quality diamonds, etc. their value is preserved by the scarcity factor, albeit somewhat undermined by their mysterious nature (at least to many). But unlike other stores of value, crypto has massive portability and can be moved anywhere in the blink of an eye. We could well return to another standard backing money, much like the old gold standard, but this standard will be crypto. This transition is already underway ... May you live in interesting times, ay?
The whole concept of forward guidance is a mistake. They should just announce rate changes when they are implemented. As it is, we've just substituted 'markets responding to an actual change' with 'markets responding to a predicted change' - which *decreases* certainty and strong decision-making.
This seems very obvious to me from a game-theoretical perspective.
We welcome your comments below. If you are not already registered, please register to comment.
Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.