While the bank cut the Official Cash Rate (OCR) from 3.5% to 3.25%, as expected, Governor Christian Hawkesby said the Monetary Policy Committee would go to its next meeting with “no clear bias”.
In other words, he couldn’t say whether it was leaning towards cutting the OCR again or not in July.
Before Wednesday, the assumption was that the OCR was firmly on a pathway south.
The projections in yesterday’s statement supported this position. The bank even pencilled in an additional cut to take the OCR to about 2.85% before the end of the year.
But Hawkesby’s remarks, and the commentary in the statement, suggested this isn’t a done deal.
Indeed, one of the committee’s six members wanted to keep the OCR at 3.5%, arguing the bank should assess the impact of the uncertain economic environment on people’s behaviours before making another move.
This was only the second time in the committee’s short history that its members weren’t in agreement, so had to vote on how to set monetary policy.
Having members share differing views is positive. But the mixed messaging between the commentary and forecasts is confusing.
While financial markets took the Reserve Bank’s messaging to be a little hawkish, economists remain divided over where the OCR will land. Some see it bottoming out at 3%, others see it falling to 2.5%.
It’s clear the committee is treading cautiously, committing to reassessing the situation as new information comes to light.
This may be sensible. But the risk is that its fence-sitting slows the economic recovery it’s trying to support - it already has a gloomier economic growth outlook than Treasury.
This could force the Reserve Bank to cut the OCR even more in the near future to regain lost ground.
One has to wonder whether the Government is quietly annoyed the bank didn’t go harder, encouraging people to borrow and invest to support the Finance Minister’s “growth agenda”.
Of course, the bank’s job is to keep inflation in check, not create the optimal amount of growth.
But if the OCR doesn’t end up stimulating the economy (the rate is currently deemed to be at the upper end of “neutral”, according to the Reserve Bank), a lot will ride on the Government’s accelerated depreciation tax support for businesses to spur growth.
Now for a bit of certainty: it’s likely floating and shorter-term fixed interest rates will keep falling out of fashion.
In March, about 60% of new mortgage flows were directed towards terms of less than a year, down from around 90% in the preceding four months.
If borrowers get a sense this could be as low as mortgage rates go, they will lock in rates for longer durations, rather than pay a premium to buy time with floating or shorter-term rates.
Reserve Bank Assistant Governor Karen Silk noted in the press conference that OCR cuts had largely already been priced into mortgage rates, but competition between banks could push rates lower.
Time will tell whether the Reserve Bank’s approach to voice caution in the face of uncertainty is the right one, or whether it’ll have to play catch-up with more rate cuts down the track.
A lot is at stake for Hawkesby, who is Governor in an acting capacity following Adrian Orr’s resignation in March.
Assuming he wants the top job, he’s undergoing a very public job interview.
Jenée Tibshraeny is the Herald‘s Wellington business editor, based in the Parliamentary Press Gallery. She specialises in government and Reserve Bank policymaking, economics and banking.
