Liam Dann: Victory in the war on inflation... but is it too soon to party?

ANALYSIS

Today’s rate cut has been greeted widely as a new dawn, a victory in the war on inflation. The Prime Minister and Finance Minister held a celebratory press conference, major banks cut mortgage rates and markets partied like it was VE Day.

Reserve Bank Governor Adrian Orr also expressed relief and admitted to using words “almost bordering on emotional” to describe his feelings about inflation being headed back to the 1-3% target band.

It might be a stretch to position Orr as a Churchillian figure in all this. To his many critics, it would be preposterous.

But he almost went there with a “darkest hour” quote when asked about the current state of the economy.

“It’s the darkest right now... it’s darkest before dawn and it’s dawn now according to our projections,” he told journalists at the press conference in Wellington.

It is presumably that darkness, the heavy gloom that has settled over the domestic economy, that prompted the Reserve Bank (RBNZ) to cut today, despite the fact that its previously published forecasts didn’t have it doing so until August next year.

Quizzed by journalists about the gap between those projections made in May and today’s cut, Orr wasn’t having a bar of it.

“We weren’t bluffing,” he told the Herald’s Jenée Tibshraeny about the RBNZ’s hawkish outlook in May.

The full committee stood behind that previously published track, he said.

“People, please understand the conditionality of economic forecasts... you need to explain that to your readers,” Orr pleaded as he was asked about it for the third, or possibly fourth time. “For us to have talked about a cut back in May would have been negligent.

“When the facts change, the decisions change,” Orr said.

That won’t be enough to placate the critics who’ve disapproved of Orr’s style since the beginning. But if we put style behind substance (as we always should), then Orr and the Monetary Policy Committee appear to have landed in about the right place.

BNZ head of research Stephen Toplis – who questioned the RBNZ’s hawkish turn in May offered – a conciliatory assessment.

“There will be those who criticise the bank for cutting so soon after a May MPS which introduced a tightening bias,” he said. “We do not think this criticism is warranted. If the data moves against your expectations, then you move your stance. This is what the bank has done.

“We think that in hindsight folk will come to accept that May was a mistake, not today’s decision.”

The RBNZ still faces some risk ahead of the next round of inflation data, that prices could spike or domestic (non-tradable) inflation proves stubborn.

Market excitement risks pushing retail mortgage rates lower than conditions warrant and the impact of tax cuts is still flowing through. It wouldn’t take much of a consumer rally to put the RBNZ on the back foot.

But Orr stressed the RBNZ is still taking cautious steps. Monetary policy was still restrictive and would remain so for some time, Orr said.

In the language of the Monetary Policy Statement: “The pace of further easing will thus be conditional on the Committee’s confidence that pricing behaviour is continuing to adapt to a low-inflation environment and that inflation expectations remain anchored around the 2% target.”

In other words, there is still scope to hit pause if required and, with market exuberance bringing mortgage rates down, no pressure to slash and burn from here.

With “an enormous amount” of forward pricing in markets the RBNZ was in a strong position “to move calmly” from here, Orr said.

Liam Dann is business editor-at-large for the New Zealand Herald. He is a senior writer and columnist, and also presents and produces videos and podcasts. He joined the Herald in 2003.