Reserve Bank Governor Adrian Orr says his decision to keep the Official Cash Rate (OCR) on hold at 1.75% was “the easiest decision I have had to make in 11 and a half years.”
But, speaking to media at the Reserve Bank on Thursday, Orr said “the hard part is what to do next.”
The kiwi dollar dropped after the OCR decision and the Monetary Policy Statement (MPS) were released, falling almost half a cent against the US to 69.3c.
The move was likely in response to Orr’s comments the next move in the OCR is “equally balanced, up or down.”
“Only time and events will tell,” Orr said in the OCR statement.
He was asked to elaborate further in his press conference.
“Yes, the door is open to a cut and a rate rise – that’s what we mean by balanced,” Orr said.
He said he the central bank went to considerable pains to outline that balance in the MPS document.
“A further reduction in the OCR, to return inflation to the target mid-point more quickly, risks creating unnecessary volatility in output, employment, and interest rates,” the MPS says.
But any OCR reductions would likely need to be reversed, as inflation pressures crept back up, it says.
A higher OCR, on the other hand, risks there being not enough demand to generate a sustained pick-up in inflation towards the target 2% mid-point.
“A longer period of low inflation risks inflation expectations falling and this becoming embedded in price-setting behaviour.”
But what could force the Reserve Bank to cut rates?
“The key risks to a rate cut would be international growth faltering, or more importantly, international financial market conditions tightening,” Orr said.
In other words, a rise in long-term interest rates, which could feed through into New Zealand lending rates.
At February’s MPS press conference, then Acting Governor Grant Spencer was also warning the next move to the OCR could be up or down.
Thursday’s statement was a much different style to that of previous Governors but has so far been welcomed by some economists.
“The defining feature of Adrian Orr’s first Monetary Policy Statement (MPS) is the clarity of the message,” BNZ Head of Research Stephen Toplis said.
“Instead of having to flounder through screeds of mumblings to find out what the Bank really thinks, the message is up front.”
ASB’s Chief Economist Nick Tuffley was also impressed by this approach, giving the Reserve Bank “top marks for the shift.”
No ‘relief’ at lower kiwi dollar
During the press conference, Orr was asked if he was “relieved” to see a lower kiwi dollar.
But Orr said relief was an emotion, and “I don’t have an emotion over currency.”
In a month, the New Zealand currency has dropped by 4.5c against the US dollar.
In terms of the central bank’s perspective on the matter, Orr said the drop in the kiwi reflected there being more sellers and buyers in the market at the previous price.
“That will be factored into what we have to do next time we boil up our monetary policy.”
As well as it being Orr’s first MPS, it was also the first time the new addition to the policy targets agreement was in play.
As well as maintaining price stability, the Reserve Bank now has to support “maximum levels of sustainable employment.”
Orr said the bank’s Head of Economics, John McDermott, has a “real challenge” around understanding what it is and how can the bank best contribute to it.
“We have gone out to New Zealand’s smartest economists and we will be talking about with the Labour market folk."
Orr fronts up to MPs
Speaking at the Finance and Expenditure Select Committee later on Thursday, Orr said it is his strong belief that the central bank can’t influence sustainable employment to any large degree.
But the Reserve Bank can contribute to maximising sustainable employment, he said.
When asked by National’s David Carter what contributes to maximum levels of sustainable employment, Orr said there are a number of factors.
“The level of employment, the employment rate, how many people are employed relative to the working age, the participation rate, unemployment rate, the underutilisation rate.”
Orr also took the opportunity to address critics of the central bank’s ability to control inflation.
“Our inflation target is 2% midpoint, 1% to 3% range.
“We have had very low and stable inflation and significant employment growth. [With] 1.5% core inflation, I believe has been an exceptional performance from this bank.”
40 Comments
I also used to think the RBNZ had it in for savers , but its not the case , rates were dropped in 2008 as a stimulus during the GFC , and now we have very low rates and sick economies , and for good measure we likely have deflation adding to our woes .
High house prices are a symptom of cheap money looking for a place to get a yield , and you should just look at other asset price rises since 2008 the NYSE, ASX and FTSE are prime examples
Change the record... The Governor signs a contract in which the principle deliverable is to maintain inflation between 1 and 3%. If anything, since they have fallen short of the mid-range for years, they should cut rates. If you haven't been able to interpret the macroeconomic background to determine which asset classes benefit and which suffer, that's on you.
He has done nothing for a very good reason ............ things are way outside his locus of control .
The world is largely in a deflationary cycle, and thats why we have "price stability " .
There is little inflation anywhere , and with massive over-capacity and under -utilization , this cycle will continue for some time .
There are some exceptions , but those tend to be counties that are hopelessly mismanaged like Venezuela , Argentina , most of sub-Saharan Africa , Syria and Turkey to name a few .
So the decision is no surprise really
Boatman,
I love reading your stuff;picking holes in your arguments is like shooting fish in a barrel.
First,in trying to appear clever,you have used the word locus inappropriately. The OED definition is locality or exact place of something. Next time,try something like,sphere of influence.
You make the assertion that there is "massive over-capacity and under-utilization",but provide no evidence to support it. It may interest you to know that US unemployment at 3.90% is lower than at any point since Dec. 2000. That is also the case in the UK and the picture is similar in NZ.
Today's economic woes need some new ideas.
The complex overly mathematical mainstream models people are taught in Economics courses just don't explain the world as it is.
Hence all the forecasts and predictions are usually wrong.
I don't see the point of the Reserve Bank if it doesn't start thinking a bit more broadly and open-mindedly about macroeconomics. As someone said about, a robot could do the job with two lines of code as it is now.
Longer term rates are rising – especially in the US – and for quite valid reasons – I don’t think he’s referring to that. Lowering the OCR on that basis would have the NZ$ plummeting and instead of worrying about the lack of inflation he would have it in bucketful’s – along with a few other problems.
I would like to think he’s more referring to the longer term interest rate markets acting in some sort of dysfunctional manner and causing short term stress.
Having said that – not sure how much powder the poor lad has in the OCR with a start point of 1.75%.
Something to be said in raising while the going’s good – give yourself a little more fire-power if needed down the road.
@Yvil . Yeah ;I was also wondering the same
I think he meant that only; may cut OCR to help creditors and borrowers with the increasing funding costs.
That could pull the NZ$ down ? Is that the only downside ?
If the funding costs rise instead of OCR cut can they increase the money supply ? (literally print money) ? Is that the same effect as OCR cut ?
Just curious how all these things work !
Greg, central bankers can't control the money supply. They can control interest rates. Money supply is endogenous and depends on private bank credit creation. They tried I believe to control the money supply for a while 30 years ago and came to the conclusion that it was impossible.
You can't have a high interest rate set by the central bank (to keep capital inflows) AND flood the banking system with excess reserves. The extra reserves would push the interest rate banks lend to each other to zero. At least that is how I understand it.
If your last paragraph was / is correct (fairly sure it isnt depending on context, but I am open to reasoning) the Q is then why is the Libor rate increasing?
"high interest rates" is also relative. If we accept there is a neutral rate which I think there is then a high interest rate is anything above that. So if the natural interest rate is 0% 2% is way too high. However once you approach 0%, say 0.25% you are pushing on a string and your only option is throw money at your economy before it collapses.
Hence when the Libor increases it means the bank's are nervous and its a sign the economy is at risk of a serious downturn?
cs, steven, can I have your opinons on why Orr would consider lowering the OCR if long-term interest rates rise?
Below is Orr's quote:
“The key risks to a rate cut would be international growth faltering, or more importantly, international financial market conditions tightening,” Orr said.
In other words, a rise in long-term interest rates, which could feed through into New Zealand lending rates.
Steven, as I understand it Libor generally tracks fed funds rate apart from in 2008 when it got spooked. Commentators suggest the recent rise is due to Fed tightening, QT undoing QE etc - i.e. reserves are being drained. Which is consistent with what I said about excess reserves and interbank rates - just in reverse.
I am not an expert on the infamous Libor - so I defer to those with great knowledge than I.
I agree that lowering the OCR to 0.25% is "really pushing on a string". But I think it being at 1.75% is also "pushing on a string." I think it is probably irrelevant if it dropped a bit or stayed the same.
I think "throwing money at your economy" in terms of well-targeted deficit spending is the only way out. Not QE per say.
Yvil, would Orr lower the ocr to help banks keep their profit margins in terms of increased interest costs offshore - well yes maybe if he really feared mortgage rates going up as a result. However, the only way they look to be going right now is down ......
That's not quite true J. C. We have not enough funds deposited in NZ to cover the total lending, therefore NZ bank must borrow overseas. If rates increase overseas, which is the whole point of this discussion, NZ banks borrowing costs will increase to some degree. Why would Orr want to lower the OCR then?
cs, you said "central bankers can't control the money supply. They can control interest rates. Money supply is endogenous and depends on private bank credit creation".
But don't LVRs, Core funding ratios and other macro prudential policy control private bank credit creation to some level?
Greg, central bankers can't control the money supply.
I think some central banks control money printing as well.. may be in developing/underdeveloped world ??
So according to u , central banks can
1. Manipulate rates
2. Bond buying /Selling ??
Thanks , in advance .
Greg - I suggest you read up on endogenous money. A good MMT perspective (which I believe makes the most sense) is here.
http://bilbo.economicoutlook.net/blog/?p=20968
"When Central Bankers Debunk Mainstream Theory".
A quote from it:
"As the BIS (Bank of International Settlements) paper points out:
… monetary policy implementation nowadays focused predominantly on achieving a target for a short term interest rate …
Which means that the “money multiplier” does not provide a meaningful framework. In a footnote, the BIS paper (Page 5) points out the irony that even though it provides no meaningful information “the money multiplier view of credit determination is still pervasive in standard macroeconomic textbooks” including”.
Other central bankers have also agreed with this view. The Federal Reserve Bank of New York Economic Policy Review (September 2008) article – Divorcing Money from Monetary Policy – clearly stated:
In recent decades, however, central banks have moved away from a direct focus on measures of the money supply. The primary focus of monetary policy has instead become the value of a short-term interest rate. In the United States, for example, the Federal Reserve’s Federal Open Market Committee (FOMC) announces a rate that it wishes to prevail in the federal funds market, where overnight loans are made among commercial banks. The tools of monetary policy are then used to guide the market interest rate toward the chosen target.
This is practice is not confined to the US. All central banks operate in this way. What this means is that central banks cannot control the “money supply” in any predictable manner and do not try to do so.
You will note that in Modern Monetary Theory (MMT) there is very little spoken about the money supply. In an endogenous money world there is very little meaning in the aggregate concept of the “money supply”.
The idea that the central banks controls the money supply is a residual from the commodity money systems where the central bank could clearly control the stock of gold, for example. But in a fiat currency, credit money system, this ability to control the stock of “money” is undermined by the demand for credit....
The “money supply” in an “entrepreneurial economy” is demand-determined – as the demand for credit expands so does the money supply. As credit is repaid the money supply shrinks. These flows are going on all the time and the stock measure we choose to call the money supply, say M3 is just an arbitrary reflection of the credit circuit."
ENJOY!
Very interesting talk from LSE yesterday on future of Central Banking - questioning a lot of "commonsense" we used to have about how things worked from a mainstream economic perspective.
https://www.youtube.com/watch?v=tm0cjuMdH8E&t=20s
But funnily enough, ends with a call for stronger (fiscal) automatic stabilisers - admitting that monetary policy isn't enough.
For all those fascinated by things macro it's a good listen.
I'm with you Greg, I have no background in finance but from my University degree in Architecture, I know how theoretical a high education can be. I'm now a businessman with experience in the real world and I would like a simple answer to my question, why would Orr consider lowering the OCR if overseas rates increase. Unfortunately, I have not heard a simple answer to that question.
Tradition has it that the reserve bank adjusts rates in a quarter of 1%. My question would be why?
To keep it unchanged now would appear to me to be saying that things have not changed enough to change it by more than 1/4%. If I was the new reserve bank governor the very first thing I would be asking: is 1/4% fine enough, or too fine?
Then again, I have not been appointed reserve bank governor!
I'm sure that he is too busy backtracking from his earlier uneducated pronouncement to even think of this.
The interest rate does not matter. Houses always rise faster than ever before...just beef em up.
Get with the program.
I purchased a million dollar house with cash and am now waiting to flip the bird to Real Estate Agents and the banks....when I sell it for 2 million,....with no commission..so Saving 4%...and 4.837564%. to the bank...yet doubling my money. ..over the weekend.
I used to believe the Interest Rate had some bearing on Savings, but it is now common sense to avoid repaying Banks and Agents.....a cent.
I am now absolutely 199% certain, all you mugs are slaves to Mortgages.... Debt and being over charged..
Just wait....do not pay a bean....sell it yourself, you can make money before Monday...when the Banks open. again.
(Remember they know nothing about processing money over Weekends.)..
Quick...list yer house...on the freebee sites....
The more the merrier, but do not ask for a pittance.....please...
If we all go for broke, just remember it is a 5 day working week.......and today is Friday....and retail banks never work.. FRIDAYS....another joke...as some will appreciate.
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