MNI INTERVIEW: RBNZ To Debate Pause To Cuts- Ex Dep Governor

MNI (MELBOURNE) - The Reserve Bank of New Zealand will lower the official cash rate 25 basis points at its October meeting to 5.0%, but will debate a pause and any further cuts will be made cautiously as the economy struggles with domestically-driven non-tradable inflation, a former deputy governor has told MNI. 

Peter Nicholl, also chair of the Monetary Policy Committee between 1990-1995, noted the Reserve had left little room not to ease at the next meeting considering its sharp turnaround since May. (See MNI RBNZ WATCH: MPC Discussed 50bp Cut, Slashes Rate Outlook) A pause would risk further damaging its credibility, he added. (See MNI INTERVIEW: RBNZ To Accelerate Cuts If Needed-Conway) 

The MPC will have to cut the OCR and hope its decision is supported by the following data prints, he continued, noting September inflation and Q3 CPI, and GDP will publish later that month. “I actually think [the MPC] is going to be cautious in October,” he said. “Price increases certainly haven't been driven out of the New Zealand system. Until they see that [non-tradable] element of the CPI starting to come down much more towards their target, I'd be very cautious about predicting a steady downward trend in interest rates over the next year.”

Q2 CPI fell 70bp to 3.3% y/y, however, non-tradable inflation only declined 10bp to 5.4%, according to StatsNZ.  

Offshore price falls had driven the decline in headline inflation, Nicholl cautioned, adding that cuts to the OCR were unlikely to be as deep as markets, and now the Reserve, are projecting. 

The RBNZ overnight index swaps market has priced in a 4.5% OCR by the end of 2024, while the Reserve’s latest Monetary Policy Statement showed the rate at 4.9% and 4.4% by mid-2025. 

Real interest rates remain low by historical standards, and central banks have likely dulled the effectiveness of monetary policy by keeping them depressed for such a long period of time, Nicholl warned, noting how financial markets had swung between extremes this year. 

CONFLICTING DATA

Nicholl cast doubt over any positive reading of the recent ANZ New Zealand Business Outlook August report, which moved 23 points to +51, its highest level in a decade (see chart), pointing out not much had changed with the country’s economy apart from the OCR cut. 

But the results also showed strong pricing intentions, both in terms of their own prices and costs, he added, stressing this should also drive the Reserve’s caution. “Some market commentators thought [the MPC] might go down by half a percent, but that's very unlikely – I think they may even debate not moving at all,” he argued. 

The Reserve had strongly focused on falling inflation expectations, which could also present a trap, Nicholl said, noting the inflation target watered down the metric’s information value. “When business knows the Reserve's got a target of 1-3% they're probably going to say 1-3%, not because they've done economic analysis, but because they know that's the target.”

GREATER FLEXIBILITY

Nicholl said the RBNZ, like most developed market central banks, had locked itself into a rigid meeting schedule which often did not match the publication of key data. It should hold meetings later in the month, he argued. 

Central banks had become less flexible over their meeting schedules to offer the market greater certainty, but this meant often making decisions without a full set of data, he added. 

Nicholl was also the former governor of the Central Bank of Bosnia between 1997-2004. 

“When we're at these turning points, central banks shouldn't wait, and just because they've announced a date, they should take the decision when the picture is clear,” he said, noting lenders will simply shift their rates should central banks dither.