Year on hold is over
The Reserve Bank’s year-long promise to hold the official cash rate at 0.25 per cent expired a month ago today, so there will be interest in its monetary policy review on Wednesday.
Up until November it was strongly assumed the bank might cut the rate to below zero this week. But the country’s stronger-than-expected bounceback in the third quarter of last year torpedoed that expectation. Since the beginning of this year there has been growing speculation that the next move in interest rates will be up rather than down – but not yet.
Reserve Bank governor Adrian Orr hosed down any suggestion of a sharp turn in monetary policy when the bank issued its last monetary policy statement in February.
‘‘Patience’’ was the key word from Orr, as he signalled the bank believed some of the positive economic news at the time might be short-term. He reiterated that stance in mid-March, saying the bank was ‘‘comfortable where we are around monetary policy’’ and wanted to see ‘‘the whites of the eyes of inflation and employment growth’’. Most economic data since the start of February suggests the economy is on a gradual downward drift even as inflation expectations rise as a result of domestic and international supply constraints.
In other words, we are in a period of gentle ‘‘stagflation’’, that could turn into headline-worthy stagflation later in the year. But there is not much monetary policy can do to address the real-world economic realities producing that outcome and nothing the Reserve Bank has said or done in recent weeks suggests it is going to try.
The major banks are now forecasting no fireworks on Wednesday, all tipping the rate to remain at 0.25 per cent, and no changes to the bank’s alternative monetary policy settings.
ANZ forecasts, for example, the Reserve Bank will take to the field with ‘‘a straight bat’’ while it waits for the dust to settle on some swirling economic variables. So the cash rate will stay at 0.25 per cent.
Ten-year bond rates in the United States have stabilised in the past few weeks at about 1.7 per cent after a sudden and rather scary climb, reflecting at least a temporary settling down in inflation expectations.
That should make the Reserve Bank feel more confident it will be able to keep rates lower for longer while still easing back its weekly quantitative easing. The bank has crossed the halfway mark on QE, having spent just over $50 billion of its $100b cap buying back government bonds but is in the market for only $420 million of bonds this week. Another relief for the Reserve Bank will be that the New Zealand dollar has eased back 4 US cents since a three-year high close to US$0.75 in late February. That could be expected to reduce the pressure the bank might otherwise have felt to trim the rate. In February, the Reserve Bank (again) indicated it felt house prices had pretty much peaked, forecasting a rise of 3.9 per cent in the year to the end of March next year. So one thing to watch for is what, if any, direct or indirect comment it may have on the likely impact of the axing of interest-payment deductibility on most housing investments and extending the bright-line test. How worried will it seem about a ‘‘hard landing’’ for the housing market?
Another sensitive subject is the implications for the broader economy of the opening of the trans-Tasman bubble. Will it display an assumption that it is likely to increase gross domestic product?
Or will it be more guarded, given the risk the traditional seasonal outflow of tourism dollars to Australia during the winter months may result in a net decrease in discretionary spending in New Zealand?