MNI INTERVIEW: "Simplistic" To See RBNZ As Hawkish-Ex-Official

Market perceptions that the Reserve Bank of New Zealand has turned hawkish are "simplistic," and the Bank is still taking an accommodative policy approach despite forecasting a rate rise late next year, a former senior RBNZ official told MNI.

Sharon Zollner, chief economist at the RBNZ for eight years until 2006, said in an interview that the policy outlook was probably little changed from February, despite the release of a forward-track Official Cash Rate projection showing a 20-basis-point rise in September 2022. The RBNZ revealed the OCR track for the first time in more than a year after its meeting on Wednesday, after having suspended its publication in order to allow the banking system to prepare for potential negative interest rates.

The market over-reacted to the projection, said Zollner, now chief economist at ANZ Bank.

"That track is conditional and is not guidance and I think that got a bit lost," she said. "And even if the forecasts for inflation in particular are accurate, any rate rise is still more than a year away and is coming off historic lows," she added.

NZD STRENGTH

Inflation would be the main factor in determining any rate rise, Zollner said.

The RBNZ's target range for inflation is mid-way between 1% and 3%, and its new forecasts are for a spike to over 2% this year before it falls back to an annualised 1.6% by September next year.

Any rise in the local dollar would be tolerated as long as prices for dairy exports remain strong, she said.

"Importers are quite comfortable with a high dollar because the equation is now better for them, and capital equipment is more affordable," Zollner said.

NEGATIVE RATES

The OCR track forecasts are based on a baseline scenario, but if conditions deteriorate rather than improve, the RBNZ's first response would be negative rates, now that the banking system has been given time to prepare, according to Zollner.

In such a scenario, the NZ government is likely to issue more bonds and this would also give the RBNZ the ability to pursue more quantitative easing, despite its self-imposed limit of buying no more than 60% of outstanding public debt.