Eyes and ears on Reserve Bank speech

Tuesday, 30 January 2024

Reserve Bank or Reverse Bank? Chief economist Paul Conway may provide some small insight on Tuesday.

Speculation has been building that Reserve Bank chief economist Paul Conway might start to walk back the bank’s hawkish stance on future interest rates on Tuesday.

However, many economists appear to think a significant change in tone from the bank is unlikely at this stage, which would suggest the speech could instead prove a fizzer.

Conway will host a webinar on the bank’s website to discuss how changes to the global economy since the Covid pandemic have created “new uncertainties and challenges for monetary policy”.

But what has most piqued economists’ interest is that the bank has also signalled Conway will make “brief comments” on domestic developments since the bank released its last monetary policy statement on November 29.

The long gap between that statement and the bank’s next monetary policy statement on February 28, has created a vacuum for analysts to salivate over the prospect of any fresh titbits that might help them second-guess the bank’s thinking on interest rates. You can watch online here.

The Reserve Bank’s November statement was widely regarded as surprisingly hawkish.

It voiced strong concerns immigration could prove a spanner in the works bringing down inflation and indicated it did not envisage the official cash rate falling below 5.5% before May or August next year, even raising the possibility of one more rate hike before then.

Reserve Bank governor Adrian Orr calls for continued 'flexibility' in how it does its job (video first published December 20, 2023).

However, financial markets and bank economists have continued to assume interest rates will instead start falling later this year.

Kiwibank chief economist Jarrod Kerr said “eyes would shift” this week to Conway’s address for hints on the Reserve Bank’s latest viewpoint, as well as to the United States Federal Reserve’s next cash rate decision on Thursday.

Kerr said Kiwibank expected “some good insights” from Conway and that he needed to address the weak economic data that had come out since its last monetary policy statement.

“It is time for the Reserve Bank to do away with threats of hikes and start pivoting towards lower interest rates,” he said.

BNZ economist Stuart Ritson said it would also be “all ears” for what the Reserve Bank made of recent soft economic data.

However, many economists have voiced doubts that the Reserve Bank is about to change its narrative.

Ritson noted it would be unusual for an individual member of the Reserve Bank’s monetary policy committee to update its commentary, and given Conway’s remarks would be “brief” anyone expecting much new guidance might be disappointed.

BNZ research head Stephen Toplis, while agreeing with Kerr that economic data pointed towards monetary easing, said last week that it was not convinced a big drop in inflation confirmed by Stats NZ last week would be sufficient to move the central bank.

Stats NZ reported annual inflation had fallen sharply to 4.7%, but Toplis noted domestic inflationary pressures during the quarter were higher than the Reserve Bank had been forecasting.

ANZ also predicted last week that “stickiness” in aspects of the inflation data meant the Reserve Bank wouldn’t be declaring victory against inflation prematurely.

Fresh jobs data published on Monday could dampen the chances of the Reserve Bank greatly changing its tune on the outlook for monetary policy.

Stats NZ reported that the number of people with jobs rose 0.2% in December, over the previous month, and that annual earnings growth rose to 5.6% after several months of trending down.

Infometrics economist Sabrina Swerdloff said December’s strong labour-market numbers might just be “a blip in the broader slowdown”, but the fact that earnings growth was still hovering at about 5% indicated that the labour market was still tight.