MNI INTERVIEW: RBNZ "Nowhere Near" Rate Cuts Discussion-Conway

The Reserve Bank of New Zealand is likely “nowhere near” rate cut discussions, and last week’s 10-basis-point reduction in its estimate of the peak Official Cash Rate track is not a dovish signal, the Reserve’s Chief Economist Paul Conway told MNI.

The RBNZ has maintained its Official Cash Rate track at about the same level for the past year, noted Conway in an interview after the decision to hold the Official Cash Rate at 5.5% for a fifth consecutive time, when the accompanying Monetary Policy Statement (MPS) downgraded the peak OCR call to 5.6% by the third quarter. (See MNI RBNZ WATCH: RBNZ Leaves Rates On Hold, Downgrades OCR Peak)

Speculation on a future rate cut was most likely linked to expectations of the U.S. Federal Reserve's next moves, Conway said.

“[The Fed] has inflation significantly lower than what we've got,” he cautioned. “We're not declaring victory yet. We need to keep the OCR at a restrictive level for a considerable period into the future to achieve our remit.”

Following the MPC’s meeting on Wednesday, Governor Adrian Orr noted the MPC had only considered a hike or a pause. Some former staffers say the Reserve could start cutting rates by mid-year, or after the publication of Q3 GDP figures. (See MNI: Chief Economist Fuels Debate Over RBNZ Rate Cut Timing)

Overnight index swap pricing implies a 25bp OCR cut at the October meeting, while predictions of a rate hike have subsided since Wednesday's decision.

Commenting on volatile rates markets, Conway noted the MPC had aligned on where the OCR needs to sit to achieve its 1-3% inflation target. “From an economics perspective, a 10bp reduction in peak OCR is not a huge deal in terms of the outlook for rate hikes going forward,” he stressed. “We’re still in that watch, worry, willing-to-act phase.”

DATA DEPENDENT

Conway pushed back against suggestions any one piece of data would sway the MPC to cut rates. “There are frontline data, such as CPI, GDP and the labour market… but I am miles away from thinking which bit of data would have to come out before we make a decision. The OCR is where it is well into next year.”

Recent dovish sentiment among market participants was likely driven by soft Q3 GDP data showing the economy contracted 0.3%, a significant miss since the Reserve had anticipated 0.3% growth.

Conway said the lower print had led the RBNZ to reassess its February MPS forecasts, but stressed the economy had performed as expected over the medium term. “I think we're picking the disinflation reasonably well as CPI forecasts have been pretty on the button, as well as a little more of it coming through tradable and non-tradable,” he added.

CPI printed at 4.7% y/y in Q4, 30bp lower than the RBNZ's forecast. The Reserve expects inflation of 3.2% by the June quarter, then 2.5% by year's end.

LABOUR RESILIENCE

Labour market resilience as headline CPI declines, likely driven by services sector strength post Covid-19, has been a pleasant surprise, Conway noted.

Weakness has however been revealed in other areas, such as reduced vacancies and underutilisation, he added. “There's different dynamics occurring in the product market and what's happening in the labour market, just because of that composition of demand," he added. "Going forward, we do think that there will be more softening in the labour market.”

Unemployment rose 10bp to 4.0% over Q4, 20bp lower than forecasted in November. The Reserve expects unemployment to reach 5.0% by Q4.

The MPC next meets April 10.