Did the RBNZ muck up its May forecasts, and/or was it simply jawboning – talking tough to try to prevent financial markets from driving down wholesale interest rates before it was confident the inflation fight was won?
The Herald put the question to Governor Adrian Orr.
“We weren’t buffing, bluffing, buffing,” he said, fumbling his words, before making a witty recovery: “The forecasts were well-buffed, but not bluffed. We always put our best foot forward for where we see the rates going.”
Orr then explained he believed the RBNZ made the best decision with the information it had at the time.
In May, it knew the annual inflation rate fell to 4% in the March quarter – just above its 1% to 3% target range.
But the RBNZ was worried non-tradeable inflation was high, at 5.8%, as high interest rates weren’t directly curbing rises in rents, rates, and insurance premiums.
The RBNZ didn’t have March quarter GDP data at the time, but knew growth was negative in four of the previous five quarters.
Nonetheless, Orr said the RBNZ would have been “negligent” if talked about OCR cuts in May.
He argued the economy had materially deteriorated since then, saying the RBNZ had lent more heavily on second tier data that gave it a timelier read of the economy - business activity surveys, electronic card transactions, vehicle traffic, house sales, and jobs data.
Importantly, it also changed its view of the amount of spare capacity it believed there was in the economy.
Orr defended the RBNZ’s massive U-turn, signalled in a short statement published at its last OCR review in July.
“These are just very standard turning points in an economy,” he said, urging people to remember forecasts are based on conditions that have upside and downside risks.
Indeed, financial markets were completely unsurprised by the OCR cut. They were begging for it.
Mixed reaction and question mark over ‘soft landing’
Infometrics chief executive Brad Olsen was still unimpressed.
He said the flip-flopping in the RBNZ’s messaging raised “massive” questions about its reading of the economy, and “frankly makes it hard to trust its judgment”.
“The RBNZ was clearly wrong about the economy in May 2024, but the yo-yo-ing in views also means that no one can be quite sure of what’s next, and the lack of accountability is galling.”
Former RBNZ manager Michael Reddell was characteristically critical of the RBNZ, saying the situation highlighted the “well-known weakness of the institution”.
He was worried about the weakness of the economy, saying the RBNZ should better recognise the lagged effect of monetary policy.
BNZ’s head of research Stephen Toplis was more diplomatic.
“If the data moves against your expectations, then you move your stance. This is what the Bank has done,” he said.
“However, back in May we questioned the decision to adopt that tightening bias and we think that in hindsight, folk will come to accept that May was a mistake.”
ANZ chief economist Sharon Zollner had empathy for the RBNZ continuing to sail in uncharted waters.
She noted the OCR is usually cut in response to some sort of negative shock, not a recession deliberately created by the RBNZ itself.
In light of this, she was worried people might have deferred, rather than cancelled, their spending plans, heightening the risk of economic activity rebounding more strongly than expected on the back of interest rate cuts.
Accordingly, Zollner said the RBNZ would have given itself more optionality if it kept the OCR at 5.5%, while adopting a more dovish tone.
How quickly it cuts the OCR from here will depend on the data, she said.
If the RBNZ’s projections come to fruition, New Zealand is in the midst of a triple dip recession, and will see the unemployment rate jump from 4.6% to 5.4% next year.
By this point, Orr will have to respond to the pertinent question he declined to answer yesterday – is this the “soft landing” the RBNZ was hoping for?
Jenee 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.
