Reserve Bank invokes the heron to explain thinking on interest rates

Tuesday, 21 September 2021

It was the heron, not the lark - nor the hawk, nor dove for that matter - that pierced the fearful hollow of thine ear.

Bank economists are pondering whether the Reserve Bank has all but confirmed it will raise the official cash rate by 25 basis points next month.

Careers are built on correctly reading the tea leaves dropped by central bankers in their speeches.

But assistant governor Christian Hawkesby threw a new one at analysts on Tuesday.

While central banks were often described as being ‘hawkish’ or ‘dovish’, it was the kōtuku (white heron) that provided “a more fitting metaphor” for their monetary policies, he said.

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What does the official cash rate mean?

Setting monetary policy required an approach that was “adaptable, sometimes moving with caution in slow, small steps, and other times moving with confidence, quickly and in large steps to remain successful,” Hawkesby said.

“In Māori culture, there are two whakataukī (proverbs) involving the kōtuku that capture this trait of responding to the environment around you.

“The saying ‘he kōtuku rerenga tahi’ loosely translates to ‘a white heron's flight is seen but once’. It expresses an idea that ‘once ready, open your wings and commit to flight’”, he said.

That approach was consistent with the Reserve Bank’s actions in the early stages of the Covid crisis last year, he said, when the bank slashed the OCR to 0.25 per cent and embarked on quantitative easing.

Reserve Bank assistant governor Christian Hawkesby has appeared to suggest the bank is preparing to move the official cash rate in small steps.

But herons were also known for taking “considered steps” as they assessed the environment around them – the source of the saying ‘tapuwae kōtuku’, Hawkesby said.

“In the world of setting monetary policy, this translates to having confidence in the outlook for the economy, and inching in the right direction based on how the economy is likely to evolve,” Hawkesby said.

“This is consistent with the observation that when there is a typical amount of uncertainty, and the risks are evenly balanced, then central banks globally tend to follow a smoothed path and keep their policy rate unchanged or move in 25 basis point increments.”

The Reserve Bank’s monetary policy committee agreed in August that its “least regrets policy stance is to further reduce the level of monetary stimulus so as to anchor inflation expectations and continue to contribute to maximum sustainable employment,” he noted.

Assuming Hawkesby was signalling that the Reserve Bank was in considered-assessment rather than sudden-flight mode, the comments would seem to strongly imply the bank is not considering raising the OCR by 50bp to 0.75 per cent at its next meeting and is instead signalling a series of smaller increases.

ASB chief economist Nick Tuffley said the speech suggested the Reserve Bank was still set to raise the OCR when it next reviews monetary policy on October 6 despite Auckland’s level 3 lockdown running “right up to the decision time” and the lockdown’s outcome being uncertain.

“Given the uncertainties over the impact of the current Covid outbreak, we would expect the Reserve Bank to take the ‘smooth/gradual approach’ and move in 25bp increments,” he said.

ANZ economists Sharon Zollner and David Croy said in a research note that it had “never thought a 50bp move was a likely start to the hiking cycle” and Hawkesby’s speech had confirmed that.

“Our OCR forecast is unchanged, with 25bp hikes to come in October and November, with steady hikes thereafter taking the OCR to 1.5 per cent by August next year,” they said.