RBNZ governor Graeme Wheeler warns there's not much he can do

Thursday, 11 August 2016

OPINION: At the start of Graeme Wheeler's press conference on his decision to cut interest rates, the Reserve Bank governor cracked a joke, but one that almost might as well be true.

Introducing students from Waikato Diocesan School for Girls, winners of the central bank's nationwide monetary policy challenge, he suggested that if it got too tough, one of them could sub in for him.

Wheeler then proceeded to give answers almost suggesting it might not matter who did his job.

Having cut interest rates to a fresh all time low and told financial markets that the New Zealand dollar 'needed' to be weaker, the markets completely ignored him.

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The kiwi jumped to a 12 month high against the United States dollar, and also climbed sharply against the Australian, British and European currencies.

Was he surprised at the market's reaction? Wheeler said nothing much surprised him about financial markets any more, and while we should wait and see what happened in the coming days, he conceded it was possible the dollar might go higher.

Did he expect the lower OCR to be passed to consumers with cheaper mortgages from banks? Wheeler said he hoped so, but the situation was 'complicated'.

They weren't, and in fact, deposit rates actually climbed.

When Wheeler rolled up to face a select committee in Parliament, also attended by the potential alternate governors from Hamilton, it was Grant Robertson cracking the jokes.

Labour's finance spokesman pointed out that the Reserve Bank's own forecast had it missing its inflation target for seven years. Inflation targeting is, after all, Wheeler's primary responsibility.

'I'm not going to use the term, 'you've got one job', but you've got a job, and it's inflation targeting,' Robertson said.

Wheeler went about explaining that there was little he could do about roughly half of the consumer price index, and despite six interest rate cuts in little over a year, the dollar remained strong.

On almost all of these counts, the market should feel sympathy for Wheeler. For all his critics, a different governor would not change the pressures from offshore.

As he points out, financial conditions are becoming more extraordinary by the day, with much of the world economy now being controlled by central banks with negative interest rates.

But Wheeler hardly helps himself and cannot possibly wonder why his communication is under constant fire. His clearest message was that the Reserve Bank was determined not to let inflation expectations drop, as this could create a deflation spiral.

Asked then for a clear signal: will you do whatever it takes to stop inflation expectations dropping, including, if it was required, consider dropping interest rates to zero?

His answer could not have been more empty. 'Let's see how the future unfolds.'

The Diocesan girls might have thought what a lark the job must be.