Reserve Bank Chief Economist Yuong Ha and Assistant Governor Christian Hawkesby

Reserve Bank Governor Adrian Orr is becoming predictably unpredictable.

Yesterday he and the Bank’s Monetary Policy Committee followed up last August’s shock 50 basis points drop in the Official Cash Rate by not moving it at all.

It stays at one per cent thereby confounding all the bank economists who on Tuesday were forecasting a 25 basis points fall in the wake of a Bank survey showing lower than expected inflation expectations.

“Well, we got that wrong,” said Kiwibank economists Jarrod Kerr and Jeremy Couchman.

“The RBNZ kept the cash rate unchanged at 1%.

“Market traders and all major bank economists had expected a cut.”

Westpac economist Dominick Stephens said financial markets were shocked by the decision.

“But we are less surprised,” he said.

“In October we pointed out that the RBNZ had never signalled a November cut, and the information available up to that time did not justify a change in stance.

“At that time, we predicted that the RBNZ would leave the OCR on hold and issue a 0.9% OCR forecast.


However, yesterday’s weak inflation expectations data changed the balance of available information, prompting us to switch to forecasting a cut.

“Of course, we are ruing that now!

“But what our vacillation really illustrates is that this was always a close call.”

And that was the overall sense of the Bank’s  Monetary Policy Statement yesterday; that the economy is precariously balanced between a sort of a boom and a sort of mild bust.

National’s Finance spokesperson, Paul Goldsmith, was happy to predict the worst.

“The Reserve Bank has lowered its growth forecasts again as economic indicators continue to show New Zealand’s economy is underperforming,” he said. 

That they had lowered the growth forecast was correct. 

Goldsmith went on: “The Reserve Bank is increasingly pessimistic about the future due to this Government’s refusal to implement any kind of economic plan to restart economic growth.”

Therein lay the dangers of making a press statement without hearing the Bank’s explanation to the Monetary Policy Statement press conference on what might happen. 

Chief economist, Yuong Ha, told the conference that the economy currently had “ups and downs”. 

“The exchange rate is lower than what we assumed this time in August,” he said. 

“But also the terms of trade are also holding up.

“So again, it’s the ups and downs, and it’s not as bleak picture as it was back in August.”

In its formal statement, the Bank said domestic economic activity was expected to increase during 2020 supported by low-interest rates, higher wage growth, and increased government spending and investment.

Assistant Bank Governor, Christian Hawkesby said: “In reference to growth remaining subdued through till the end of this year, we are nearly at the end of this year already.

“So we are predicting things to pick up from here.

“We know that there is this monetary stimulus and some fiscal stimulus coming through and they underpin our projections.”

In previous Monetary Policy Statements Orr has called on the Government to start spending to kickstart the economy.

But that message was missing yesterday with Orr suggesting it had been heard over the road in the Beehive.

“You don’t have to keep shouting, you know,” he said.

“To the extent that it’s been repeated many, many times in the press I imagine that it’s being heard.

“We don’t have anything to add to that.”

However answering questions from journalists, Orr did come back to the need for the Government to play its part.

And once again, he identified infrastructure spending as one area that could be targeted.

“We have very well-identified infrastructure demands and needs,” he said.

“We have a government balance sheet that is looking healthy, both historically and relative to many other countries.

“We have secular low nominal interest rates, which is the hurdle rate to investment.

“And so, you know, this is, if needed, a time to be fiscal spending.”

But he conceded this was an area over which the Bank had no control.

“They (the Government) will do what they do.

“And we’ve made out our message very clear.

“Meanwhile, we will continue to do whatever it takes with our tools.

“Many countries have suggested that monetary policy tools may be secondary to some of the fiscal policy tools.

“We’re not in that position at the moment, but we always like to have friends.”

Another potential spending avenue could come from homeowners whose houses might maintain or increase their value as a consequence of the low-interest rates.

Orr said the so-called “wealth effect” from increasing house values was important because of the significant weight of household wealth in home equity.

“So that perceived wealth that the value of my house has gone up; I can I can spend more;  I can feel more confident in my spending or I can even borrow more and leverage more is a big channel in the New Zealand economy,” he said.

“ Having said that, though, there are many other monetary channels that we are very pleased to see operating.

“The relatively stimulatory level of the exchange rate and export earnings in terms of trade improvements are all about nominal income growth in New Zealand.

“Likewise, the hurdle rate for investor investment and business investment and government investment are all important hurdles.

“So this is not a  one pony show.”

 However, Orr is warning that there may be future constraints on growth in New Zealand.

“There is a sense of a lower potential growth rate in the economy, in part because of lower net immigration,” he said.

So though the Bank is not pessimistic, it is not overly optimistic either.

And it reflected that with the formal statement acknowledging that interest rates would remain low.

“Interest rates will need to remain at low levels for a prolonged period to ensure inflation reaches the mid-point of our target range, and employment remains around its maximum sustainable level,” the statement said.

“We are committed to achieving our inflation and employment objectives.

“We will add further monetary stimulus if needed.”

So the further cut the Banks were anticipating yesterday may yet happen — just not this year.