RBNZ Governor Graeme Wheeler, if he has not already done so, will be thinking hard about both the tone and specific wording of this Thursday’s OCR review statement.
It is not in the RBNZ’s manner to abruptly change their monetary policy stance from “some interest rate increases sometime in the future” to “absolutely no interest rate increases, ever” as the market and commentators seem to be implying of late.
Therefore, my bet is that the statement on Thursday will not be as dovish (bearish, negative view of the economic outlook) as what the market expects.
While current inflation is below the 1% to 3% target band and lower than what the RBNZ were themselves forecasting, the mandate the RBNZ are charged with is about average inflation over the business cycle.
Therefore, they must and do look forward at likely future inflation levels and can “look through” first-round oil price impacts.
Last week’s lower than expected historical CPI outcome has everyone immediately overtly dovish, however the RBNZ will be looking forward and not back and for this reason will not be altering their forward guidance on monetary policy settings too much at this point.
In addition, the message about the NZ dollar currency value being “unjustifiably and unsustainably too high” requires some revision after the 18% deprecation in the NZD/USD from 0.8800 to 0.7400 over the last six months.
Global events and investor behaviour over recent months have driven our long-term interest rates back down to near post GFC lows.
Our three to five year swap interest rates at 3.65%, the same level is floating 90-day interest rates, presents the RBNZ with another problem as banks slash fixed rate mortgage lending rates.
The last thing the RBNZ will want to do is to reduce the OCR in the face of mortgage interest rates well below their comfort zone in terms of the residential property boom in Auckland and Christchurch. Hence, the renewed pressure on the RBNZ to examine further macro-prudential controls on bank mortgage lending such as the household income to debt servicing ratios that the UK has implemented.
Adding to the complex mix of economic issues the RBNZ have to deal with at the minute is the potential for lower than expected GDP growth this year as the rural sector is hit by an increasingly dry summer.
The last economic recession in New Zealand in 2008/2009 was more about an overly tight monetary policy at the time colliding with a drought in the Waikato. The RBNZ will be conscious of the massive impact weather patterns have on the overall economy.
The timing of interest rate increase may have been pushed forward, however they certainly cannot disappear altogether.
Just because the Canadians cut their interest rates due to lower oil prices whacking their GDP growth, there is no rational reason or justification for an entirely different NZ economy to do the same.
Lower oil prices are positive for the NZ economy, whereas they are negative for the Canadians.
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Roger J Kerr is a partner at PwC. He specialises in fixed interest securities and is a commentator on economics and markets. More commentary and useful information on fixed interest investing can be found at rogeradvice.com
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