If, as expected, Reserve Bank Governor Alan Bollard leaves the official cash rate on hold at 2.5 per cent tomorrow, it will probably be the right call, according to a panel of economists and business leaders set up by the New Zealand Institute of Economic Research.
Modelled on a similar exercise run by the Australian National University's Centre for Applied Macro-economic Analysis, the NZIER Shadow Board's nine members are asked to give a percentage value for how much they prefer each interest rate the central bank might go for.
The results are then aggregated to provide a collective board view, which gives an indication of how convinced they are of their preferred view and also how they see the distribution of risks around it.
The shadow board's first such judgment put a 68 per cent probability on no change being the most appropriate call, but the risks were distinctly skewed to the downside, with a 16 per cent weighting for a 25-basis-point cut and 10 per cent for a 50-basis-point cut.
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Kirdan Lees, a former Reserve Bank economist now with the institute who has set up the project, puts the case for a probabilistic indicator like this: "Monetary policy is rife with uncertainty. The state of the cycle is imprecise, how the economy evolves unsure, and the trade-offs across monetary policy objectives up for grabs. This means a range of possible policy settings might be appropriate at any point in time."
The shadow board consists of ANZ chief economist Cameron Bagrie, The Warehouse chief executive Luke Blunt, NZIER principal economist Shamubeel Eaqub, Westpac chief economist Dominick Stephens, Business New Zealand chief executive Phil O'Reilly, Victoria University's Professor Viv Hall, Bank of New Zealand head of research Stephen Toplis, Steel & Tube chief executive Dave Taylor and Professor Christoph Thoenissen, also of Victoria University.
While six of the nine were decidedly of the view that sitting pat on 2.5 per cent would be the right call, Eaqub favours a 50-basis-point cut, even though he expects the bank will remain on hold until next year. "Typically, low interest rates discourage savings and encourage borrowing. To date, the opposite has happened."
Toplis sees the Reserve Bank as caught between three possible scenarios: that the economy muddles through the next few years with modest growth; or that somewhere in the world, most likely Europe, implodes and takes the rest of us with it; or that the reconstruction of Christchurch "goes nuts" and proves much more inflationary than expected.
Toplis puts a probability of 45 per cent on the muddle-through scenario, 35 per cent on global meltdown and 20 per cent on the rebuilding proving much more of an inflationary problem than anticipated. Steel & Tube's Dave Taylor sees the distribution of risks similarly to Toplis.
In the most recent Reuters poll of 14 forecasters, none expects a rise in the OCR this time, four think it will have increased by the end of September and nine by the end of the year.