Watching the Reserve Bank grandees in action yesterday brought to mind the old Groucho Marx line: "Who you gonna believe, me or your lyin' eyes?"

Since the previous monetary policy statement in August, the main cyclical vital signs of the economy have proven healthier than the Reserve Bank — and, to be fair, other forecasters — had expected.

And not just a bit better. Economic growth in the June quarter came in at 1 per cent, not the 0.5 per cent the bank had forecast.


Inflation in the year to September was 1.9 per cent, not the 1.4 per cent it had forecast three months ago.

And the labour market readings this week confirmed the trend, with the unemployment rate dropping to 3.9 per cent when the central bank had forecast 4.5 per cent, and that despite a rise in the labour force participation rate to a record-equalling 71.1 per cent.

The financial market's conclusion has been that the hurdle for a future cut to the official cash rate has got higher.

And yesterday's statement dropped the previous language that the next move could be up or down. But governor Adrian Orr insisted that the option of a rate cut remains on the table.

The forecast errors were within the usual bounds of uncertainty, he said, and he invited us to look at the big picture: we have got low and stable inflation and one of the lowest levels of unemployment in history.

In other words, give us a break.

Embarrassed economic forecasters can always find ways of explaining away or downplaying their misses.

The latest gross domestic product numbers are for the June quarter and we are already half way through the December quarter. That was then and this is now.


More timely partial indicators have been holding up pretty well, but the bank points to downside risks to growth from weak business sentiment and a rise in trade protectionism globally.

The household labour force survey can provide numbers that saw-tooth around quarter to quarter, and as it is based on a survey, it is subject to sampling error.

But it is a large sample and Statistics New Zealand puts the margin of sampling error at 0.3 percentage points.

So that was a statistically significant drop from the 4.4 per cent unemployment rate recorded in June, and the trend measure of unemployment has now been improving for seven straight quarters.

The headcount increase in the number of people employed — 2.8 per cent over the year (the Reserve Bank had forecast 2.1 per cent) — outstripped the increase in hours worked, which was 2.2 per cent.

But we can at least hope there was some increase in labour productivity on top of that.

The jump in inflation from 1.5 per cent in June to 1.9 per cent in September was largely driven by the increase in petrol prices, two-thirds of which was due to higher international oil prices and a weaker kiwi dollar.

Since then global crude prices have retreated somewhat; who knows for how long?

In the meantime, the Reserve Bank's projections assume that firms have limited capacity to pass through higher fuel costs to generalised consumer prices and that their inflation expectations will remain well anchored.

The bank also acknowledges that higher petrol prices mean households have less money to spend on other things.

"To the extent that lower domestic demand feeds through into reduced capacity pressures, monetary policy may need to become more stimulatory to support employment and medium-term inflation."

Non-tradeables inflation also came in a couple of ticks higher than forecast.

But that is a good thing, the bank suggested.

Core inflation still remains below the 2 per cent mid-point of the target band, and if inflation is creeping higher, well, that is what the interest rate cuts two years ago were meant to deliver.

It's all going to plan, and if a bit sooner than expected, that is welcome.

In the meantime, the increase in petrol prices probably explains a lot of the drop in surveyed consumer confidence, which may also have been influenced by the Funeral March tone of the business sentiment surveys.

But Wednesday's quarterly employment survey tells us that weekly gross earnings — a measure of the collective pay of wage and salary earners — rose 5.2 per cent in the latest year. While that is slower than the 5.6 per cent recorded three and six months earlier, it would not capture the effects of the Government's families package.

Core retail sales (that is, excluding spending at the pump) charged to plastic cards in September were up 5.1 per cent on September last year.

Fixed mortgage interest rates have been trending lower for the past six months or so.

The alternative more lugubrious and dovish view, however, goes like this: the state of the labour market is a lagging indicator.

Monetary policy, and business planning for that matter, has to be about the future and what the business confidence surveys are saying about squeezed profit margins and faltering investment intentions has to be respected.

In addition, export commodity prices have been trending lower, even with a weaker kiwi dollar.

Global growth forecasts have been revised down and there are a number of potential flashpoints which could turn a gentle decline in the growth rate into an outright downturn.

Orr said he was struck at a recent International Monetary Fund meeting by how much concern there was about global tail risks.

Notable among them are worries about how trade tensions might play out and about the impact on some emerging markets as US interest rates rise, and what had been a flood tide of cheap money globally turns into an ebb tide.

So we are left with a picture where the recent past has proven stronger than expected and the bank's (forthcoming) employment objective is met, but inflation is still south of target, leaving the bank to conclude that it will keep the OCR at an "expansionary" level for a considerable period yet.