FXStreet (Bali) – Mark Smith, Senior Economist at ANZ, reviews the latest speech by RBNZ Governor Wheeler this morning, entitled “Some Reflections on the World of Central Banking”, noting that the message appears consistent with their broad view that while the OCR is probably heading lower in time, the next cut is not likely to occur at the next meeting.
Key Quotes
The key paragraph was: “Recent economic indicators have been more encouraging. Some further easing in the OCR seems likely, but this will continue to depend on the emerging flow of economic data. At the same time, however, we remain conscious of the impact that low interest rates can have on housing demand and its potential to feed into higher price inflation. It is important also to consider whether borrowing costs are constraining investment, and the need to have sufficient capacity to cut interest rates if the global economy slows significantly.”
“The speech acknowledges the considerable uncertainties over the inflation outlook and the likelihood there is a structural element to low domestic inflation. If these prove more enduring than the RBNZ expect there are likely to be implications for OCR settings.”
“Furthermore, policy operates in a complex environment. There is considerable uncertainty over how the world works and what lies ahead, with the lags in the impact of policy settings a further complication.”
“As such, the speech notes that “mechanistic approaches to setting monetary policy don’t work” and that “central bankers try to acknowledge these uncertainties and the associated imprecision of policy through the nuances and conditional language”.
“The speech also acknowledged there are limits to what monetary policy can do, with the comment that markets have tended to overestimate its impact: “Monetary policy is, however, relatively powerless to influence the decisions that determine long-run economic performance and distributional outcomes”.”
The RBNZ also notes there are other drivers on the NZD besides domestic policy settings: “Monetary policy also can’t prevent international developments from affecting our economy, including through commodity prices and the exchange rate.
“In this regard, there is little that monetary policy can do to persistently lower an exchange rate, whether through the choice of exchange rate regime or direct policy actions”. “
“All up, it’s steady as she goes, with the speech consistent with our expectation that the OCR will left on hold this month as the Bank assesses the impact of the 75bps of cuts delivered thus far, before delivering a further cut next year. However, developments on the global scene remain key.”
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