ANZ economists explained markets don’t believe the RBNZ’s tough talk and remain captivated by lower global rates.
They said global long-term bond yields continued their decline last week, on the back of dovish comments made by a typically hawkish Federal Reserve governor in the United States.
“How Fed policy evolves doesn’t directly affect RBNZ policy, but the New Zealand bond market remains highly correlated to the US, and the ‘cuts are coming’ vibe is capping long-end yields here,” ANZ economists said.
“Short-end rates are also lower despite the RBNZ’s hawkish tone.”
Hawkesby acknowledged the RBNZ was leaning against a market influenced by global factors.
“The trend globally has been for global investors to want to pick when the next rate cut is. So, there’s a lot of downward pressure on global yield curves.”
Hawkesby also made the comment that investors tend to lump central banks together and sometimes make “sweeping assumptions” about who’s going to move first and who’s going to follow.
He believed some may assume the RBNZ will be one of the first central banks to start cutting interest rates because it was among the first to start hiking them in 2021.
“But we need to set monetary policy for New Zealand,” Hawkesby cautioned.
He noted the New Zealand economy had unique features that affected inflation.
Top on the RBNZ’s radar was record-high immigration. While employers had been crying out for workers, population growth is adding to economic demand, putting upward pressure on prices – especially rents and house prices.
Underlining the RBNZ’s position, Hawkesby said, “We’re really just not in the mindset of cutting the OCR. It’s really just not an option on the table at the moment.”
Asia-based Kiwi economist of Wigram Capital Advisors, Rodney Jones, agreed one shouldn’t transpose what’s happening in the US to New Zealand.
He noted the New Zealand labour market isn’t as flexible as the United States’, it’s more exposed to changes in freight rates and its small size means there are more duopolies and oligopolies.
“There is no economy like the US,” Jones said, cautioning the cost of bringing down inflation is higher in countries likes New Zealand and Australia.
Nonetheless, ANZ economists believed financial markets would keep dancing to the global beat – at least until the RBNZ makes good on its threat to lift the OCR again.
Hawkesby suspected it might take some time for the central bank’s message to sink in.
“My experience is that sometimes it takes a little while for the market to digest a Monetary Policy Statement,” he said.
“We just don’t measure our success on the short-term market reaction. We keep focused on the medium-term and our mandate and how that’s going to play out.”
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.
