BNZ's head of research Stephen Toplis says the Reserve Bank 'does have a track record' of withdrawing guidance on the future forecast level of the Official Cash Rate

The Reserve Bank (RBNZ) "couldn't be blamed" if it decided to withdraw its forecasts of the future level of the Official Cash Rate (OCR) because of the current global uncertainty, BNZ head of research Stephen Toplis said.

In BNZ's weekly Markets Outlook publication, Toplis says the global central banking community has been thrown into disarray.

"Donald Trump has thrown global trade into chaos. He’s created volatility in financial markets. He’s raised fears of recession in the United States alongside the prospect of rising inflation. He’s created massive uncertainty across the planet," he said.

Toplis said the BNZ economists were therefore waiting "with bated breath" for the RBNZ’s approach to the current situation to be revealed.

"It does have a track record of withdrawing guidance," he said.

"In the monetary policy decisions of May 2020, August 2020, November 2020 and February 2021 (as COVID raged) the RBNZ provided no OCR projection past March 2021. There is no reason why it couldn’t do something similar at the May 28 announcement this year. It certainly couldn’t be blamed for doing so."

And Toplis noted that RBNZ officials have already highlighted the possibility that they might produce more scenario analysis in future "even before the Trump wrecking ball was swung".

RBNZ chief economist Paul Conway said earlier this month that the central bank would consider publishing multiple economic scenarios and policy responses, as suggested by former US Federal Reserve chair Ben Bernanke at a recent monetary policy conference held by the RBNZ.

“In the past, the Reserve Bank has published alternative scenarios, not for some time. I think when I first worked here in the late 90s, we were doing that fairly regularly,” Conway said. 

“I'm very open to it. We'll have a think about it. Maybe this global trade war is an opportunity for us to publish a scenario on a worst case scenario. That’s not a promise, it's something we’ll think about between now and [the next policy meeting]”. 

The RBNZ's next Monetary Policy Statement (MPS) and OCR review are on May 28. At the moment the OCR is at 3.5% and the RBNZ's most recent forecast - made in the last MPS document on February 19 - was for a low point for the OCR of 3.00%-3.25% by the end of this year. However, since that time market pricing has moved firmly in favour of a low point for the OCR of 2.75% by October.

Toplis said BNZ economists' "central view" remains that weakness in the economy demands further rate cuts to maintain the current level of mortgage rates, "which are already based on the assumption that the cash rate falls to around 2.75%".

"We don’t think now would be a great time to effectively tighten monetary conditions especially when growth expectations are being revised lower and the strengthening NZD is already tightening conditions," Toplis said.

Notwithstanding this, however, he cautioned that "inflation is not dead and buried".

"It is already trending higher on an annual basis and early signs are that inflation expectations, particularly in the household sector, are rising. This being so and, given the uncertainty that pervades, we would caution against the [Reserve] Bank moving rates any more than 25 basis points were it to continue its easing path."

Meanwhile, Kiwibank economists in their weekly First View publication say damage already done through heightened uncertainty has already hurt the global economy and outlook.

"Our upside scenario is hopeful Trump will quickly close out 'deals' for most countries lower than the initially stated reciprocal tariffs," they say.

"But the longer negotiations take, the longer the global economy remains in a heightened sense of insecurity. And the greater the damage to global growth, which is already feeding through now."