MNI INTERVIEW: RBNZ To Accelerate Cuts If Needed-Conway

MNI (MELBOURNE) - The Reserve Bank of New Zealand will accelerate cuts to the Official Cash Rate should the economy slow faster than anticipated, its chief economist told MNI, dismissing criticism of the Bank's forecasting capacity following its abrupt shift to a more dovish stance.

The RBNZ’s moves to slash its anticipated rate path and cut the overnight cash rate by 25 basis points to 5.25% on Wednesday, despite having earlier insisted that easing was distant, resulted from a significant economic slowdown and changes in inflation expectations since the last forecast round in May, Paul Conway told MNI in an interview.

While the Monetary Policy Committee discussed a 50bp cut at its meeting this week, it quickly ruled it out for the more cautious approach, he noted.

“The economy changes. It moves and we're a nimble central bank. We need to move along with it in terms of monetary policy strategy," Conway said. "It's also been a pretty volatile economic environment globally and domestically. It would have been remiss of us to hang on to an outdated forecast and persist with it when there was clear evidence that the economy had moved in different ways than what we were anticipating."

MAY'S MISS

Former RBNZ staffers had accused the central bank of misforecasting following the Bank’s May Monetary Policy Statement, which projected a further OCR hike despite evidence of a slowing economy. (See MNI: RBNZ Cuts Incoming, Ex Staffers Question OCR Predictions)

Conway said May’s forecasts were based on economic conditions at the time.

“Economics is not an exact science – it’s bordering on art,” he said. “If people back then were predicting weaker growth and more contained price-setting behaviours, then that's good. They're on the right side of that one. But within the range of feasible outlooks for the economy, given starting points, our May MPS was definitely among them.”

August’s MPS forecasts slashed the peak OCR track by about 100bp by mid-2025 from May’s predictions. The RBNZ now expects the country to dive back into recession over Q2 and Q3, revised from the slight growth it predicted in May. (See chart)

Conway stressed that high-frequency data sets had all sharply shifted over the last few months to paint a picture of economic contraction.

“We've also done quite a bit of work looking at inflation-setting behaviours and we currently are less concerned than we were in May about the risk of persistent inflation pressures,” he noted. 

“It became pretty apparent this time around that we are seeing more economic weakness than we predicted back in May, and we are seeing less evidence of persistent, sticky, non-tradeable or domestically-generated inflation. Inflation expectations have pretty much returned to target. The facts have changed. The economy is very much changed. The data has changed.” (See charts)

SOLID FORECASTING

Conway pushed back against suggestions the RBNZ's economics department required greater resources, noting it had a solid forecasting track record when compared to market economists. 

The Reserve last conducted a review of its forecasting in late 2022 and is required to perform one every five years. 

Conway said the central bank’s economics department had expanded over the last couple of years. "We're doing more research than had been the case previously," he added. "It's not just that forecasting team, but there's plenty of research feeding into that team as well. We are well on top of it."