Reserve Bank may need to begin basing OCR on facts rather than fears

Tuesday, 13 July 2021

Infometrics chief forecaster Gareth Kiernan and senior economist Brad Olsen discuss how the difficulty finding workers, and higher costs, might push up interest rates.

OPINION: After 16 months with the Official Cash Rate on hold at 0.25 per cent, monetary policy is entering a period of much greater unpredictability.

So much so that you’d have to wonder how much weight the Reserve Bank’s upcoming monetary policy review on Wednesday will even carry, and for how long.

The gulf has widened between the expectations of bank economists and the Reserve Bank since the central bank’s last monetary policy statement in May.

For the first time in more than a year there are some mixed views among bank economists about what the central bank should actually do right now.

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BNZ research head Stephen Toplis has argued that the country’s stronger-than expected economic recovery already supports a rate rise.

Reserve Bank governor Adrian Orr has repeatedly signalled it will “look through” short-term inflation when setting interest rates.

ANZ’s chief economist Sharon Zollner has said, from her point of view, the “sooner the better”.

But it would be a monumental surprise if the Reserve Bank decided to bump up interest rates on Wednesday.

All of the major banks are instead forecasting it will wait until November, although if Zollner is right, Reserve Bank governor Adrian Orr might be wise to think about creating some wriggle room to move in August.

Toplis says that as the Reserve Bank won’t update its actual projections for the OCR on Wednesday, much of the focus will be on its “wording”.

The Reserve Bank will probably need to acknowledge that the strength of the economic recovery has taken it by surprise – wrong-footed it even.

Its forecast for a 0.6 per cent decline in GDP in the first quarter of this year, when the economy actually grew 1.6 per cent, was a very big miss.

But the Reserve Bank will be entitled to point out that there remains a great deal of uncertainty about whether and for how long the economic recovery will be sustained.

The economy narrowly dodged a bullet when an infected Australian tourist fortuitously passed through Wellington without incident last month.

The difficulty that Australia is having containing its current Delta-strain Covid outbreak suggests New Zealand was lucky to escape a month-long level-3 lockdown, or worse.

One thing to watch for on Wednesday will be any recognition from the bank that it may soon have to make the big calls based on the economic conditions that are actually prevailing, rather than on guesses about what may or may not be around the next corner, because who knows what that is?

Whatever words it crafts, they could be soon drowned out by inflation data that will be released by Stats NZ on Friday, new labour market figures due out on August 4, or at any time by a fresh Covid community outbreak.