How has Reserve Bank governor Adrian Orr's trip to Jackson Hole influenced his thinking? Photo / Mark Mitchell
Mortgage holders, secretly hoping an economic slowdown will see interest rates fall soon, may be out of luck.
The western world's most influential central banker, Federal Reserve chair Jerome Powell, underlined his resolve to bring inflation in the United States back to 2 per cent in a speech delivered a few weeks ago.
Addressing his counterparts from around the world at a retreat in Jackson Hole, Wyoming, Powell said the Fed would take "forceful and rapid steps" to keep inflation expectations anchored.
"Our responsibility to deliver price stability is unconditional," he told those at the conference, including Reserve Bank of New Zealand (RBNZ) governor Adrian Orr.
The Reserve Bank of Australia has since hiked its benchmark interest rate by 50 points, while both the European Central Bank and the Bank of Canada have lifted their rates by 75 points.
Economists continue to expect the RBNZ to hike the official cash rate (OCR) in 50-point increments two more times before the end of the year, before sitting tight and waiting for higher interest rates to flow through the economy.
However, some are interested in the extent to which the hawkish vibes of the Jackson Hole gathering have rubbed off on Orr.
ANZ economists now see the RBNZ keeping the OCR at its projected peak of 4 per cent for "several" years. The RBNZ, in its latest monetary policy statement released on August 17, projected the OCR coming off its peak a bit sooner, in late 2024.
The statement was decidedly hawkish. The RBNZ saw inflation being worse than previously expected, so signalled it would hike the OCR more aggressively and leave it at an elevated level for longer than it planned in May.
Nonetheless, ANZ senior strategist David Croy noted comments Orr made shortly after the statement was released, including in an interview he did with the Herald, were a touch more doveish.
Orr didn't take the opportunity to lean against markets pricing in lower longer-term rates at the time. Rather, he said, "markets will be markets".
He also said he was comfortable with the fact banks could start offering lower mortgage rates before the RBNZ eventually starts cutting the OCR.
However, Croy noted Orr's tone changed when he got back from Jackson Hole. He was much more hawkish in an interview he did with Bernard Hickey on a Spinoff podcast.
"There will be a prolonged period where economic demand has to be reduced to below the potential growth rate of the economy to take the inflation pressures out," Orr said.
He also observed much of the academic focus at Jackson Hole was on whether the new post-Covid environment was one characterised by "a lower permanent growth trajectory".
"Monetary policy can smooth the pain through time, or shift it between sectors, but it can't avoid pain being met," Orr said.
These comments stood out as particularly hawkish to Sean Keane of Triple T Consulting. In an economic note distributed by Credit Suisse, Keane noted Orr's last trip to Jackson Hole in August 2019 strongly influenced his thinking.
It "amplified and subsequently accelerated the strong easing bias he had at that time", Keane said.
John McDermott, a former RBNZ chief economist who's been to Jackson Hole on a couple of occasions in the past, said the gathering provided central bankers and academics with a great opportunity to problem solve. He expected attendees' thinking to be influenced by the meeting.
"Since Jackson Hole, Fed officials have become much more disciplined about staying on messages in order to regain their credibility to re-anchor inflation to 2 per cent," McDermott said.
"It would be a good lesson for New Zealand to pick up on."
Lending and term deposit rates in New Zealand aren't only influenced by the RBNZ. While shorter-term rates correlate more closely with the OCR, longer-term rates are more influenced by global money markets, which the Fed has a lot of sway over.
So even if the RBNZ's next monetary policy statement wasn't any more hawkish than its August one, the Fed's actions would still put upward pressure on longer-term mortgage rates in particular.
It is for this reason Sense Partners economist Shamubeel Eaqub maintained the RBNZ doesn't need to hike the OCR as aggressively as it is. Rather, it could leave the Fed to do the heavy lifting and free ride on the back of that.
Eaqub worried the RBNZ's approach was unbalanced and risked killing the economy without effectively killing inflation.