Orr walking a tightrope on health of economy

Adrian Orr’s latest move as Reserve Bank governor appeared to deliver something for everyone, at a time when the state of the economy is the subject of so much debate.

In suggesting that he would keep the official cash rate (OCR) at the record low 1.75 per cent until 2020, it appeared on one level to signal that the Reserve Bank was doing almost nothing, but the issue was up for debate.

Prime Minister Jacinda Ardern took last Thursday’s announcement as something of an endorsement of her Government’s economic plan.

At a time when business confidence is low, Ardern said Orr was talking about how ‘‘there is certainty for business looking to invest now, and he’s encouraging businesses to go out and do that’’.

National leader Simon Bridges, meanwhile, urged New Zealanders to ignore Orr’s words and look at the actions, which were ‘‘the biggest vote of no-confidence in the economy’’ he could have delivered, given the tools at his disposal.

Above all else, Orr’s job is communication, so it might appear concerning that such contrasting views are being taken from the same announcement.

Any misstep could move the currency, while Orr, more than anyone else, could damage business confidence were he to be seen to validate the worries being felt by businesses across New Zealand.

But rather than delivering mixed messages, the new Reserve Bank governor was walking something of a tightrope. He is clearly trying to boost confidence in New Zealand’s economy, but many of the messages he delivered pointed to concerns.

While he did offer that there was a ‘‘green light’’ for businesses to invest, amid strong export prices and low unemployment, it was hardly the glowing message which Ardern claimed. ‘‘There is uncertainty in businesses’ minds at the moment, and we’re cognisant of that,’’ he said at his press conference on Thursday. ‘‘Hence we have, kind of, tempered, I would say, our growth for investment.’’

Orr also welcomed the moderation in house prices, which he expected to continue to grow only very slowly in the coming years. After the surge in house prices of recent years, a slowdown is welcome news indeed.

But when asked why he was so confident prices would pick up again – with some estimates that New Zealand may be short by 100,000 houses compared with what it needs – the picture he painted appeared to be delicate. ‘‘Household debt levels are very highly utilised. It’s very hard to see how increased gearing from here will make enormous sense . . . likewise, bank lending behaviour has become more cautious,’’ Orr told reporters.

In simple language, he appears to be saying that households owe a lot of money on their mortgages and taking on more debt would be foolish, a message the banks appeared to have already picked up as they pull back on lending.

Moreover, while the Reserve Bank is not forecasting that Auckland house prices, which are close to flat-lining, will turn into a correction, Orr indicated that the assumption price rises would now be slow and steady was betting against history. When bubbles come off the boil, the aftermath is not one which is usually without pain.

There is much to like about New Zealand’s economy right now, with low unemployment, solid commodity prices and a weaker currency helping keep income for exporters high and making the country more attractive to tourists.

But growth has slowed unexpectedly, as the Reserve Bank acknowledges, and there is a risk the funk across the business sector will persist, with BNZ warning it was seeing ‘‘anecdotal evidence’’ that investment decisions were being postponed.

Should the situation persist, however, Orr gave the strongest signal possible that he will respond as he can, by using all the tools at his disposal.

Amid its forecasts that by mid-2019 the economy will return to annual growth of more than 3 per cent, the Reserve Bank appeared to say that if that doesn’t happen – if growth continues at a slow but hardly recessionary rate – it is prepared to slash interest rates, possibly close to zero.

Although Orr maintains that the Reserve Bank is in a ‘‘sweet spot’’ and that conditions are good for businesses to invest, its actions appear to show a central bank in a delicate position.

Ardern is wrong to take the governor’s statement in the light she has, given he is acknowledging the risk that business confidence could have on growth.

Equally, Bridges might reflect on whether Orr is showing a lack of confidence in the economy, or is concerned about how much of a hospital pass an overheated housing market was for National to leave the new Government.

Orr is clearly trying to boost confidence in New Zealand’s economy, but many of the messages he delivered pointed to concerns.