MNI: Chief Economist Fuels Debate Over RBNZ Rate Cut Timing

A recent presentation by the Reserve Bank of New Zealand's chief economist aimed at tempering market rate cut expectations has fuelled debate among former staffers over when the central bank will likely make its move, with some calling the Reserve's bluff, and others making the case for a reduction in the third quarter.

John McDermott, executive director at Motu Economic and Public Policy Research and RBNZ assistant governor between 2007-2019, said some market participants underestimated the monetary policy committee (MPC)’s desire to see more quarterly data before it judges inflation under control, noting the Q3 CPI print could be decisive.

The RBNZ expects CPI at 2.9% q/q by Q3, within its 1-3% target band, down from 3.7% in Q2. The latest read showed CPI grew 4.7% y/y over the December quarter. (See chart)

A recent presentation by RBNZ Chief Economist Paul Conway, in which he dismissed lower inflation as driven by eased capacity pressure, but interpreted weak GDP as either a technical revision or a lack of supply, was intended to temper the market's rate-cut expectations, McDermott said. “That's very hawkish. The message is that [the economy] doesn’t have any more surplus capacity than previously thought, so the job of controlling inflation is still very much before it,” he added.

The market now expects a 25bp cut to the 5.5% Official Cash Rate by the Aug 14 meeting. Prior to Conway's address, traders had expected a cut by the July 10 decision.

EARLIER CUT

Michael Reddell, independent economic commentator and former special adviser, economics, at the Reserve, said the MPC may not require Q3's data. The Reserve should have some idea by then of how fast inflation is falling, particularly if the economy tracks its forecasts, he added.

"If so, they will almost certainly have cut by then," he noted. The actions of peer central banks will also influence the committee, Reddell continued. "Both because the MPC itself will be conscious of those choices and the associated inflation situation but also because if two or three of those other central banks have already cut, the public, political and market pressure on the RBNZ will be quite intense."

Domestic inflation has fallen quickly, while global price rises have softened dramatically – a factor Conway neglected, Reddell added. “When a whole bunch of somewhat similar economies are finding inflation falling faster than they expected, it's probably a story for us as well,” he argued.

MNI reported last month the RBNZ may cut rates mid-year as inflation falls faster than anticipated and GDP continues to decline, despite its hawkish tone. (See MNI INTERVIEW: RBNZ To Cut Mid-Year, Despite Tough Talk)

While Conway pointed to changes in GDP calculation methodologies, Reddell noted that annual economic growth remained weak. “Per capita GDP is not much short of what we saw during the global financial crisis,” he noted. Employment, however, had remained strong, which could support the economy further. The central bank will likely hold steady for the next two meetings should data continue to print in line with expectations, he said.

The MPC next meets on Feb 28.