I’m still not entirely sure what to make of yesterday’s OCR decision by the new Reserve Bank Monetary Policy Committee.
This was my first reaction yesterday afternoon.
If I have a problem, it isn’t with the OCR now being at 1 per cent. At the time of the last OCR review in late June I was mildly critical of the Bank for not having cut the OCR then
Data have weakened here and abroad, inflation is – and has persistently been – below target, the exchange rate is holding up, and there is little real prospect of a sustained reacceleration of growth or of inflation pressures. Oh, and market measures of medium-term inflation expectations are around 1 per cent, not 2 per cent. In that climate, being a little pro-active and cutting the OCR now looks to have been the better choice. It isn’t clear what the risks to moving would have been. It is only six weeks until the next MPS, but (a) the MPC won’t have a lot more domestic information between now and then…and (b) the way the global situation is going one can’t rule out the possibility that another cut could have been warranted by then.
And so half of me is inclined to give the Bank some credit for catching up (I don’t think there is any sense in which they have now got ahead of the game). It was certainly a fairly courageous call – although whether that is more in the Sir Humphrey sense perhaps remains to be seen – when the easier path would have been to have cut by 25 basis points yesterday and strongly signalled the likelihood of a 25 basis point cut in September.
And there was some rhetoric from the Governor at his press conference that I quite liked, including the reaffirmation of the effectiveness of monetary policy, the emphasis on the very low global nominal interest rate environment (which everyone just has to learn to work with) and a sense of being serious about getting core inflation back to 2 per cent, observing that there was worse things in the world to worry about than if the Bank were to look back 18 months from now and see inflation and inflation expectations rising. In my words, after a decade of undershooting the target, you probably shouldn’t aim to overshoot, but the harm if you happen to is likely to be small. I also liked the Governor’s affirmation of the point that cutting relatively energetically now may (probably slightly) reduce the risk of serious constraints on conventional monetary policy a bit down the track (by helping to hold inflation expectations up).
And yet conventions and communications matter.
50 basis point moves in interest rates used to be fairly normal (in our first ever tightening cycle. almost 20 years ago now. the OCR was raised by 50 basis points on three separate occasions). But both here and abroad moving in 50 basis point bites went out of fashion (and I use the word deliberately – it is a choice, on which not that much hangs, but it was one most advanced country central banks defaulted to). In New Zealand, we had some very large individual OCR cuts during the international financial crises and recession of 2008/09 when not only was the hard economic and financial data deteriorating very rapidly, but bank funding margins were rising (so that OCR cuts were partly offsetting those incipient higher market rates). And we cut the OCR by 50 basis points in the immediate wake of the February 2011 earthquake, explicitly as a pre-emptive precautionary strike against the possibility of a very sharp drop-off in confidence and economic activity – explicitly noting that the cut was likely to be temporary. And that was it. Until yesterday. Even when Graeme Wheeler was setting out determined to raise the OCR by 200 basis points, he didn’t do so in 50 basis point bites.
As I noted the choices are partly about fashion and convention (including the choice – pure choice – to do things in multiples of 25 basis points: we and most advanced countries do that but in India yesterday they cut by 35 basis points). Fashions and conventions can change, but roadmaps and markers to observers then take on a fresh importance.
And there were no signals whatever from the Bank that it was shifting to a mode of operating, and setting monetary policy, in which 50 basis point adjustment were back on the table in what are still relatively normal times (from a NZ macro perspective). Perhaps it is tiresome to make the point again, but the Governor has given not a single substantive speech on monetary policy in the 17 months he has been in office. No senior official of the Bank, including the new external MPC members, has given a speech this year, let alone in recent months, marking out how they think about the economy, about what is actually going on, about transmissions mechanisms, reaction functions etc, or even how they approach the more tactical issues around timing and magnitude of OCR adjustments. That isn’t good enough, especially from a Bank which boasts – as the Governor did yesterday (and wrongly) – about how transparent the Bank is.
I recall that when the OCR system was introduced Adrian Orr – then the Bank’s chief economist – was vocally opposed to having, or using, OCR reviews other than those tied to the release of a Monetary Policy Statement. I thought that approach was nuts (with 4 MPSs a year, even moving in 50 point bites it restricted us to 200 basis points of changes a year), and the original design (8 serious reviews a year) prevailed). Is part of the explanation for yesterday’s surprise move – and when no one picked your move, you should ask again just how transparent you are – that the Governor still doesn’t like the idea of moving outside the context of a Monetary Policy Statement? Perhaps not, but they have just not communicated with us, until they emerge with the surprise decree from the mountain-top.
And what makes it a bit more concerning is that it is pretty clear the Bank itself wasn’t intending to move by 50 basis points even a few days ago. The projections they published yesterday were finalised on 1 August (last Thursday). On those numbers, the projections for the OCR (quarterly average) were:
September quarter 2019 1.4 per cent
December quarter 2019 1.2 per cent
March quarter 2020 1.1 per cent
With the next OCR review in late September and the following one in md-November, those projections – adopted by the whole MPC – clearly envisaged not getting to a 1 per cent OCR even by the end of the year.
The bulk of the Monetary Policy Statement itself is written in the same relatively relaxed style, with no hint of a change in policy approach, and thus no proper articulation of the reason for it, or (hence) for how we should think about how the Committee will react, in principle, at future OCR reviews. The Bank has added to uncertainty around policy, not reduced it. In a similar vein, there is a new two page Box A in the statement on “monetary policy strategy”, intended to run each quarter, which is so general as to add nothing to the state of understanding of what the MPC and the Bank are up to.
And you will look in vain for any real insight from the minutes of the MPC meeting. We are told
The members debated the relative benefits of reducing the OCR by 25 basis points and communicating an easing bias, versus reducing the OCR by 50 basis points now. The Committee noted both options were consistent with the forward path in the projections. [a claim that demonstrably isn’t true – see above] The Committee reached a consensus to cut the OCR by 50 basis points to 1.0 percent. They agreed that the larger initial monetary stimulus would best ensure the Committee continues to meet its inflation and employment objectives.
But nothing about the considerations Committee members took into account in belatedly lurching to a 50 point OCR cut, or how they think about the conventions and signalling around using 25 point moves vs 50 point moves (when things aren’t falling apart here – and it was the Governor yesterday who announced, oddly, of New Zealand that “the country is in a great condition”).
The press conference also offered few insights into what the Bank was up to. The external members weren’t invited to say anything, and showed no sign of offering to (at least some of them were there), and the staff MPC members the Governor did invite to comment were no more forthcoming or enlightening: they couldn’t or wouldn’t tell us what persuaded the Committee to move by 50 points, beyond handwaving about “the whole story, domestic and foreign”, even as the Assistant Governor noted that it was unwise to react too strongly to any particular piece of news (true, but……you seem to have). And how seriously are we supposed to take the idea of “consensus” decisionmaking, when allegedly all seven of them suddenly shifted to a quite unexpected – out of the mainstream – OCR call in just the last few days?
In the end perhaps none of it matters too much. On my reckoning, the OCR ends up where it probably should have been – just less smoothly than it should have been – and on the reckoning of some of the more dovish market commentators, it ends up now where they thought it would be next month. The substance isn’t unduly affected. But this episode won’t help the Reserve Bank’s reputation for being a steady pair of hands on the tiller. Observers abroad will look at them oddly – are things really that bad in New Zealand? – those at home will be less sure how to read the Reserve Bank, and the Bank must have known it would feed fairly silly stories (from National that the 50 bps cut shows how bad things are, from Labour that the 50 bps cut shows what a great time it is to invest in New Zealand). They really should do better than that.
If the Reserve Bank’s Board was actually interested in doing its job, rather than covering for their appointees (something of a conflict of interest surely?) they would be asking hard questions now about just what went on: why the Bank didn’t move in July, why they chose to act so unexpectedly yesterday, why they couldn’t have waited until September for the second 25, why the projections are so out of step with the decision, why the MPS itself gives little articulation of the case, and why serious speeches on the economy and monetary policy seem now not to be a thing at the Reserve Bank of New Zealand. The Governor has an ambition for the Bank to be the best central bank. On the evidence of yesterday they are very far from that (ridiculously unrealistic) objective.
I have various points on other aspects of the MPS and the press conference but will save them for a separate post.