MNI INTERVIEW: RBNZ's Uncertainty To Persist-Chief Economist

The uncertainty over the outlook for inflation that led to the first dissent against a Reserve Bank of New Zealand’s Official Cash Rate decision in more than two years is likely to still be present at the next meeting on July 9, Chief Economist Paul Conway told MNI, noting the current 3.25% rate is likely not at restrictive levels.

Pointing to Wednesday’s 5-1 decision to cut by 25 basis points, Conway noted that the unidentified dissenter felt the need to clarify whether slightly higher inflation and expectations would normalise before easing. (See MNI RBNZ WATCH: 5-1 Vote Drives 25bp Cut To 3.25%) It is normal for the Monetary Policy Committee to have to take its decision to a vote at peaks or troughs of the OCR cycle, he said in an interview, adding that, with the cash rate firmly in the 2.5-3.5% neutral band, the outcome of July’s meeting is difficult to signal in advance via forward guidance.

“We're sort of leaving it to the market. To some extent, we've released that short end of the yield curve and we're asking ‘what do you guys think is going to happen?’ We’re being less equivocal on what we think is coming at the next meeting.”

While the committee reached consensus on the forecasts and the OCR track, projecting the rate falling to 2.85% by December, Conway noted that waiting to lower the rate would have allowed the Reserve to collect further data amid the uncertain international environment. The market has priced in a 29% chance of a move lower in July and a 48% chance at the Aug 20 meeting.

The RBNZ will produce another round of inflation expectations before the July meeting, though these issues will likely extend further into the year, Conway added. The Reserve will then “feel its way” with further easing, which would evolve over time with new data.

“We're not waiting for this miraculous moment where Donald Trump lays out his agenda and promises to stick to it,” he commented.

GDP GROWTH

Weaker GDP growth, alongside significant excess capacity in the economy, will likely require further easing, according to Conway. “Our economy is recovering, it's just sluggish,” he said.

Prices for exports are high, which could provide a boost to future growth and help soak up overcapacity, Conway said. “We've done 225bp of easing since August last year and we're starting to see the effects of that in the economy, and the committee is expecting the impact of that to grow.”

New Zealand’s Treasury projects GDP growth of 0.7% in the second quarter, more than double the RBNZ’s expectation for 0.3%, and 0.8% in the third quarter, versus only 0.2%.

“If GDP growth evolves more quickly than we're expecting, that output gap closes more quickly, then, yeah … that's less disinflationary pressures in the economy,” Conway said, “At the moment, both [Treasury and the RBNZ] agree that there's a negative output gap, that there's disinflationary pressures.”

NEUTRAL ZONE 

The RBNZ made no update to its estimated neutral range in May’s Monetary Policy Statement, and the MPC believes the current OCR is not restricting growth, Conway said.

However, neutral is expressed as a zone, and the committee prefers to avoids more precise targets, he continued. “It's economics, not physics, unfortunately,” he said, noting neutral is constantly shifting. Just three years ago, the RBNZ believed neutral was around 2%.

“We need to see the effects of the interest rate on the economy, and then we can deduce whether we're being restrictive or stimulatory or neutral. But at 3.25% we're definitely in that neutral zone. Our central projection has it going to 2.85%... We own that rate track, that's an MPC view. But are we sure that we're going to cut it by 25bp at our next meeting? No, we're not.”