RBNZ Review – February 2021: Keeping Options Open

MNI Point of View:

• The main challenge faced by the Reserve Bank was striking a fine balance between acknowledging a solid run of data readings while avoiding any tightening commitments. Unsurprisingly, the main monetary policy settings – the OCR as well as LSAP and FLP parameters – were left unchanged and the Committee focused on cautiously brushing away nascent hawkish speculation without losing credibility. Its preferred way out of this conundrum was by keeping a range of options on the table, even when it meant leaving some questions unanswered.
• It came as no surprise that the latest MPS included some material upgrades to economic forecasts. Since the November meeting, virtually everything went better than expected and policymakers had to account for evident green shoots in the economy while producing new projections. They now expect CPI to accelerate to +2.5% Y/Y by the middle of the year (above the 2.0% mid-point of the target range) and see unemployment peaking at 5.2% this year. The latter forecast represents a marked shift – November MPS predicted that the jobless rate will rise as high as to 6.4% before eventually easing off. Despite admitting that the outlook has improved, the MPC made an effort to downplay enthusiasm by conveying a glass-half-empty message and to keep all options on the table.
• The Statement featured a notable lift in the unconstrained OCR track (see the accompanying chart), with its trough moved 72bp higher versus the November MPS. The amount of stimulus needed to achieve the RBNZ's objectives is now seen at zero towards the end of 2022. However, the RBNZ refrained from extending the standard OCR track beyond March. This is consistent with the fact that existing forward guidance to keep the OCR unchanged through March terminates before the next Monetary Policy Review but, again, it also allows the Reserve Bank to keep their options open.
• Before the meeting, we pointed to questions surrounding gradual reductions in the pace of bond-buying conducted under the LSAP programme. The MPC sought to downplay speculation that they amount to a subtle form of tapering, noting that adjustments in weekly purchases are a function of market functioning and "do not represent a change in monetary policy stance." While this declaration seems like an attempt to quell hawkish expectations, it is unclear how much we can rely on it. After all, market conditions are not isolated from the broader condition of the economy. Diminished need for government borrowing reflects the ongoing economic recovery, with lower unemployment supporting tax revenue and reducing expenses for social welfare benefits.
• New Zealand's recovery from the initial hit delivered by the Covid-19 pandemic has been, in comparative terms, rather impressive. Given that a premature withdrawal of stimulus could have regrettable consequences, this put the RBNZ in a difficult position. Embracing their "least regrets" approach, policymakers chose to signal their concern with caveats surrounding the positives seen to date, reiterate their readiness to continue providing monetary stimulus for an extended period of time and retain as much optionality as possible.

MNI RBNZ Review February 2021.pdf