The first statement from the Reserve Bank of New Zealand under the leadership of new Governor Graeme Wheeler was appropriately balanced. The statement finishes with: “For now it remains appropriate for the OCR to be held at 2.5%.” I concur and continue to believe the next move in interest rates is up.
With respect to the global economy the Bank continues to point to the fragility of the global economy but notes the improved sentiment and a more balanced risk to the outlook. Agreed. Recent data, particularly out of America and China, has been supportive of our view that the recent slowdown in growth is bottoming out and that a modest recovery is likely next year. The US “fiscal cliff” is the major near-term uncertainty.
The paragraph on the domestic economy was essentially unchanged from September: there are positives and negatives for the growth outlook. On the plus side we have the increasingly evident recovery in the housing market and the Canterbury rebuild while on the downside we have fiscal consolidation and the high New Zealand dollar. Our own growth forecasts for the second half of 2012 have the New Zealand economy growing at around half the pace of the first half before picking up into 2013.
The Bank acknowledges the current low inflation rate (headline inflation 0.8% for the year to September), but continues to expect inflation to head back to the middle of the target range. Again, that’s consistent with our own view.
All that means the Bank retains its tightening bias, it’s just a matter of when to begin the process. I think that’s entirely appropriate. While I would never rule anything out, an interest rate cut retains a low probability. Most calls for a reduction in interest rates appear tied to the perception that such a move would bring the New Zealand dollar down. I’m not convinced that’s the case. The NZD is high for a number of reasons, not the least of which is quantitative easing in America and elsewhere.
At possibly high risk of reading too much into a couple of phrases, I like the acknowledgement that further recovery in the global economy remains “heavily dependent on policy implementation”. I think in many countries around the world policy makers have become too reliant on monetary policy to fix their woes. As I’ve said many times before monetary policy can’t fix structural economic problems, for that we require a broader policy response. It will come as no surprise to regular readers that I also like the statement: “We will continue to monitor inflation indicators, such as pricing intention and inflation expectation data, closely over coming months.”
Those sentences together seem to me to be an entirely apt reminder that monetary policy plays an important but limited role in building higher sustainable growth and that role is anchoring inflation expectations. If that makes me a hawk, then I’m happy to be one.