The first interest rate move by a new governor of the Reserve Bank is bound to be closely watched this morning. Graeme Wheeler's first monthly review of the official cash rate comes at a difficult moment. Inflation reported last week for the year to September 30 was lower than expected, lower, at 0.8 per cent, than the Government intended when it set the bank a target of 1-3 per cent annually.
At the same time, house prices are high, the Christchurch rebuild is on the horizon, a wet year has boosted farm production. The governor, as always, has to look beyond the present and act on the bank's best estimate of the consumers price index in 18 months or two years.
He must also look around the world, especially to the United States, China and Australia, our main export markets, and decide whether they are on a path to recovery or inflation. They are more worried about the slow pace of growth than eventual inflation and have loosened their monetary settings of late. Should New Zealand follow suit?
The official cash rate has been at 2.5 per cent, an all-time low, and until very recently the only question economists were asking was, when should the bank start to lift it? The previous governor said not before March-June next year. Now the consensus has changed. A panel of economists assembled by the Institute of Economic Research is divided on whether the new governor should hold the rate or cut it.
Almost half would cut, citing inflation below the target band, low growth, unemployment and the high exchange rate. The divided opinion reflects uncertainty on both sides and suggests that whatever Mr Wheeler has decided to do this morning will probably be respected. There are good arguments for cutting or holding the rate and sometimes it takes the pressure of decision-making to clarify the right course.
Mr Wheeler is operating under a subtly different policy target from Alan Bollard. The Government has kept the 1-3 per cent inflation range but added a rider that the figure should be near the 2 per cent mid-point. Under Dr Bollard the figure went above 3 per cent in nearly four of his 10 years and averaged 2.6 per cent. Mr Wheeler's instructions therefore represent a tightening of monetary direction and might be a reason to make no change to the cash rate today.
He also is obliged to monitor asset prices, which was not part of Dr Bollard's formal task though he did try to contain the housing bubble with not much more than verbal means. The resurgence of Auckland house prices this year has clearly not generated a rise in household spending and credit, but Mr Wheeler might not want to take the risk. House prices are another reason to hold the rate.
The best reasons for lowering it are to keep in step with trading partners and possibly give exporters some relief from the high dollar. Under Mr Wheeler's contract, like Dr Bollard's before him, he must "seek to avoid unnecessary instability in output, interest rates and the exchange rate". That injunction is subsidiary to the primary goal of containing inflation but it matters. If inflation is likely to remain well within its range, the exchange rate argues for a lower OCR.
Inflation seems a remote threat with leading economies still struggling to sustain a slow recovery from the crisis four years ago. But their fiscal deficits, mounting debt and "quantitative easing" spell inflation sooner or later. Mr Wheeler's task is to avoid consigning us to the same fate. He should hold the rate.