MNI: RBNZ Cuts Incoming, Ex Staffers Question OCR Predictions

The Reserve Bank of New Zealand Monetary Policy Committee has locked itself into an uncomfortably hawkish position with its Official Cash Rate track showing an additional hike this year as the economy slows, former senior RBNZ economists told MNI, adding that a cut is likely to come by late 2024 but could be justified by as soon as the Aug 14 meeting.

A range of metrics, such as inflation expectations, retail spending and business confidence, will slow GDP growth considerably over the course of 2024, said Geoff Mortlock, financial consultant and former financial stability advisor at the RBNZ.

“The output gap is consistent with inflationary pressures diminishing,” he added. “The real OCR is really quite high, while inflation expectations one-year out have fallen, which should have a significant negative impact on consumer spending and business sentiment consistent with getting inflation down.”

The RBNZ’s OCR track, which showed the rate peaking at 5.7% from its current 5.5% level by December within the most recent Monetary Policy Statement, failed to illustrate the potentially slower economy and was likely driven by the surprise non-tradable inflation Q1 print, Mortlock added.

“The economy is already in a very subdued state, and it's getting worse,” he argued. “I think we will see the OCR come down much sooner.”

New Zealand dollar overnight index swaps have about 45 basis points of easing priced in by December, which is about right, according to Mortlock.

CHANGED TRACK

Mortlock called on the RBNZ to replace its predictive OCR track, which risked locking the bank into a rigid course of action, with a more assumptions-driven approach.

“[The Reserve] was too slow in raising, it badly got it wrong on the bond purchase programme that was undoubtedly a contributor to inflation and I fear that it will be to slow to ease and we're going to fall into a deeper recession than needed.”

RBNZ Chief Economist Paul Conway has stated multiple times the Reserve would not cut the OCR anytime soon. (See MNI INTERVIEW: RBNZ Credible, Cuts Still Distant - Conway)

However Conway noted in the press following the Reserve’s May decision that the bank could consider presenting its OCR forecast as multiple scenarios based on different future economic conditions.

Michael Reddell, independent economic commentator and former special adviser, economics, at the Reserve, said the RBNZ had failed to communicate effectively the direction of the economy in the face of ambiguous data and the output of its models.

“It's not quite clear why they think there's going to be an economic recovery either with policy as tight as it is for next year,” he said, adding that the RBNZ could be justified in easing by August, but is likely to hold off until later in the year.

He added the bank’s forecasts are also based on the assumption that growth will pick up strongly from the September quarter. “I don’t think that's where we are,” he noted.

RBNZ SHAKE UP

Mortlock said the Reserve could face change this year should the government appoint a more aggressive RBNZ chair following the conclusion of the current Chairman Neil Quigley’s term at the end of June.

He called on Finance Minister Nicola Willis to push for greater accountability of the MPC and Governor Adrian Orr. “As with any operationally independent government entity, it should be subjected to robust monitoring and discipline around. The whole space really needs to be given much, much greater attention,” Mortlock said. (See MNI INTERVIEW: RBNZ Reform To Add Urgency To Inflation Fight)

Reddell doubted Willis would install a more contentious chair, despite tense relations between Orr and the government. “It's clear [Willis’s National Party] is strongly opposed to Orr, but I think she will probably go for another person who won't rock the boat.”