Obstacles block efforts to move the markets.

Key Points:

Reserve Bank governor Graeme Wheeler might be wondering right now what he has to do to move the needle on retail interest rates or the dollar. The bank last week delivered an extremely dovish monetary policy statement. It cut the official cash rate 25 basis points to 2 per cent, as it had signalled, and was unusually unequivocal in its forward guidance. On the basis of its current projections and assumptions, more easing will be required, it said. Not "might be" or "likely to be" - "will be". Nevertheless, the kiwi dollar jumped, though only briefly. It swiftly fell back again against both the US dollar and on a trade-weighted basis, but only to the elevated levels prevailing before the statement. As Wheeler ruefully acknowledged to MPs on the finance and expenditure select committee, "we have limited influence over the exchange rate". Meanwhile, on average the banks have passed on only 10 basis points of the latest OCR cut to their floating mortgage rates. Indeed, David Chaston at interest.co.nz points out that they have passed on only 42 of the last 75 basis points of OCR cuts. But the Reserve Bank argues that the more important way it acts on the mortgage belt, via the banks, is in signalling its expectations for the OCR, thereby influencing the forward track of wholesale interest rates, from which banks price fixed mortgage rates and business lending. The financial markets and the banks don't wait for it to deliver on those expectations. More broadly, while the Reserve Bank considers monetary policy in some northern hemisphere countries to be "approaching the limits of effectiveness", it does not believe that is true of New Zealand. It still has the conventional ammunition of policy rate cuts in its bandolier. Nonetheless, its chief economist and assistant governor John McDermott acknowledges that some of the channels through which monetary policy affects the real economy have silted up a bit. For instance, the statistics indicate a lot of households with mortgages are taking advantage of lower interest rates to accelerate the repayment of their loans rather than spending more. As for business investment, Wheeler told the MPs, "I don't have a lot of businesspeople telling me the cost of borrowing is a major constraint on their ability to invest." This cycle is unusual, McDermott said, in having a prolonged period - four years so far - of negative tradables inflation. As tradables make up nearly half the consumers price index, this has contributed to an extended period of weak headline inflation. It increases the risk of dragging down inflation expectations into a self-fulfilling spiral that ends in the quicksand of deflation. Not that there is much sign of that yet. This week's retail sales data for the June quarter had sales up 6 per cent in real or volume terms on the June quarter last year, but up 5.5 per cent in nominal or dollar terms. That indicates that prices in the shops fell overall during the year. And the falls were widespread, with the retail sales deflators negative in eight of the 15 retail subsectors. But did consumers respond by putting off purchases in the hope of lower prices down the track? Hardly. They just bought more stuff. Even in per capita terms, spending was up nearly 4 per cent on a year ago, almost certainly outstripping income growth. Even with Statistics NZ's new and tighter measure of unemployment, there are 131,000 people officially unemployed. More broadly, there are 342,000 people classified as "underutilised". That includes the unemployed, another 106,000 who are under-employed (part-timers who would like to and could work more hours) and 93,000 "available potential jobseekers" who are not actively seeking work (and so don't count as unemployed) but who want a job and are available to start one.

We have limited influence over the exchange rate.
Reserve Bank governor, Graeme Wheeler
For some of the Reserve Bank's critics, such numbers are an indictment. They are seen as evidence that monetary policy has been too tight, that the bank was wrong to raise the OCR in 2014 and has been too slow to reverse those hikes and cut further. The current unemployment rate of 5.1 per cent is still well above the 4 per cent the Treasury now estimates to be the unemployment rate that would drive inflation higher. The bank's defenders, however, might note that an unemployment rate of 5.1 per cent is down from a (revised) peak of 6.7 per cent four years ago - a period which saw a surge in net immigration turbocharge growth in the labour supply. Is the level of unemployment testimony to a want of demand in the economy? Other indicators, like rip-roaring retail sales, suggest not. Or is it about a skills mismatch between the demand and supply sides of the labour market? Or about prohibitive housing costs in Auckland providing an impediment to labour mobility within the country? The central bank cannot do anything about migration policy or the state of the Australian economy or skill shortages. And as for housing costs as a barrier to mobility, cutting interest rates when the housing market is so inflamed is counterproductive to the extent it increases house price inflation. Nor can it do anything about the deflationary rip running in the global economy. But Wheeler told the MPs that if economic growth picks up, as the bank forecasts, from around 2.5 per cent now to around 3.5 per cent over the next year to two, some of the credit for that should go to accommodative monetary policy. If the bank's current forecasts prove accurate - always a big "if" - including the further one or two OCR cuts they assume, in 18 months' time we will be looking at economic growth of 3.4 per cent, an unemployment rate of 4.4 per cent and inflation at 1.7 per cent. It would be hard to complain about that.