RBNZ board is pressed to put many hard questions about surprise slashing of the OCR

Michael Reddell, on his Croaking Cassandra blog, has scolded the Reserve Bank Monetary Policy Committee about its prowess – or lack of it – in the communications department.

His concerns were raised by the committee’s decision – announced yesterday along with the latest Monetary Policy Statement – to lop the Official Cash Rate by 50 basis points to 1 per cent.

As Westpac commentators noted:

“This was a stunning decision – in the history of the OCR, the only times the OCR has been cut by 50bps or more have been after the 9/11 terrorist attack, during the GFC, and after the Christchurch earthquake. We are very surprised that the RBNZ decided to cut 50bps in today’s environment.”

Reddell was surprised, too, and is urging the RBNZ’s board to ask hard questions about just what went on before the announcement.

Why didn’t the Bank move in July, why did it act so unexpectedly yesterday, why couldn’t it have done the usual thing and dropped the OCR by 25 basis points now and waited until September for the second 25, why are the economic projections so out of step with the decision, why did the Monetary Policy Statement give little articulation of the case for a bigger-than-usual cut, and why do senior RBNZ executives no longer make serious speeches about the economy and monetary policy?

Point of Order can add one more question:  did the RBNZ give a heads-up to Finance Minister Grant Robertson about that intentions that caught market analysts by surprise?

We ask because the OCR announcement was made at 2pm.

Yet a few minutes later, in Parliament, Robertson made no mention of it when he answered the first question of the day.

The question was a patsy from New Lynn MP Deborah Russell:

“What recent reports has he seen on the New Zealand economy?”

Robertson replied:

“I’ve seen a number of reports that emphasise the current strength of the New Zealand economy, following the release of yesterday’s labour market statistics.

“Yesterday, BNZ economists said, ‘For the economy, today’s figures were all good news.  More people are being employed, the unemployment rate is low, and, on average, consumer spending power is on the increase’.

“ASB economists said that the labour market radiates some warmth, and Stuff said, ‘The [best] pay rises in 10 years’. I am pleased to see we still have many New Zealanders who see the glass as half-full.”

In reply to a follow-up question, Robertson mentioned the ASB’s latest Rural Economic Note, which said dairy prices dipped 2.6 percent overnight against the backdrop of the escalating trade war between the US and China.

“ASB economists have said we are in uncharted territory with regards to the US-China trade war.”

Similarly, Robertson referenced ANZ economists who warned the previous day that global risks have escalated dramatically in recent times, after developments in the US-China trade war.

“They said, ‘The escalation in trade tensions will hit both the US and Chinese economies hard, and cause collateral damage across Asia in particular”. We are cognisant of these risks but, fortunately, the fundamentals of the New Zealand economy remain strong. The books are in good shape, unemployment is low, and we are well-placed to respond to these challenges’.”

Russell then asked:

“How is the Government ensuring New Zealand’s economy is resilient to international risks?”

Hansard records the response:

Hon GRANT ROBERTSON: We have taken action to stimulate the economy by increasing investment, including through Budget 2019, where we significantly lifted both operating and capital allowances. This includes investing $10 billion more capital than the previous Government had done. We’ve also, over the last two years, brought in an R & D tax incentive that is going to benefit 2,000 businesses. We’re investing in regional economies, through the Provincial Growth Fund. We are reforming skills and trade training to address long-term labour shortages and productivity gaps. We’ve established, and we are working closely with, the Business Advisory Council to harness the expertise of the private sector. We’re deepening our trade base, and we’re ensuring that capital is flowing through both the Green Investment Fund and the soon-to-be-established Venture Investment Fund.

A 50 basis points cut in the Official Cash Rate – surely – was a stimulatory move, too.

It may well have been made by an independent committee, but surely Robertson was aware of it.

By the time the question five came up for a ministerial rely, National’s Paul Goldsmith clearly was armed with knowledge of the size of the OCR cut.

Hon Paul Goldsmith: Is he at all worried that at a time when New Zealand still has historically high terms of trade and should be doing well, we have the lowest interest rates in our history?

Hon GRANT ROBERTSON: As we were talking about just in the earlier questions, this is a global phenomenon. We are seeing historically low interest rates across the world. What we do know is a combination of what the monetary policy levers can pull and what the Government can do with our fiscal policy stimulus means that New Zealand can build on the strong position we have to weather this global downturn.

Hon Paul Goldsmith: Does he agree with the Reserve Bank Governor’s conclusions in the statement released at 2 o’clock, “Indicators of growth have remained weak or weakened further over the past few months.”?

Hon GRANT ROBERTSON: Just as the member has, we’ve both just received that statement, and I note that the tone of it overall is one that says, yes, there is lower growth. We’ve covered that before in this House. That is a global trend and, indeed, that is reflected in the Governor’s statement.

It’s the surprise factor in the RBNZ’s lopping of the OCR that has drawn flak from Reddell.

He complains 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).”

He further complains – yet again –  that governor Adrian Orr 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.”

There was nothing in the Monetary Policy Statement 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 the governor yesterday announced “the country is in a great condition”.

The RBNZ press conference 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 … “

And that’s why Reddell is insisting the Reserve Bank’s Board must ask all those hard questions about just what went on.

Alas, his advice is unlikely to be taken.

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