NZ interest rate probably headed lower, but now there is doubt
ANALYSIS: Some soothing words from Reserve Bank governor Adrian Orr seem to have financial markets second-guessing the assumption that another cut to interest rates is coming in November.
After taking markets off-guard by lopping a half-percent off the Official Cash Rate in August, no-one was quite ruling out the Reserve Bank cutting rates again when it released its statement on the OCR on Wednesday.
But instead, it hammered home its great satisfaction that its earlier, larger-than-expected rate cut appeared to have had the affect it intended, with retail interest rates and the New Zealand dollar declining.
ASB chief economist Nick Tuffley, like his counterparts at other banks, continues to expect a 25 basis-point cut in November which would take the OCR to 0.75 per cent, but concluded the Reserve Bank's OCR statement suggested that "wasn't a dead certainty".
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Indeed, if the Reserve Bank was so sure it would need to cut rates again in November, it would presumably have done so this week.
The central logic for its (line call) 50 basis-point cut in August can be summed up by 'do today what you reckon you'll otherwise need to do tomorrow'.
Orr further stabilised sentiment around the monetary policy outlook on Thursday when he gave a speech in Auckland.
There, he reinforced previous reassurances that the August interest-rate cut had not been guided by any skeletons lurking in the cupboard that would be unbeknown to financial markets.
Rather, he appeared to acknowledge the bank could have been accused of moving too much, too soon, by arguing better that than "risk doing too little too late".
But what attracted the most interest from financial analysts was his comment that the current view of the Reserve Bank was that it was "unlikely to need 'unconventional' monetary policy tools".
That struck a somewhat different tone to his comments in August, when he said at a press conference that it was "easily within the realms of possibility that we might have to use negative interest rates".
The 50 basis-point cut had probably reduced the probability of that, he said then, "but I don't know by how much".
There wasn't a lot of good economic news between those statements, so the changed tone appears quite deliberate.
Whether a negative OCR really should be described as an unconventional policy tool and talked about in the same breath as other radical measures that have been explored by the bank such as quantitative easing, is highly debatable.
For sure, negative rates are still "unusual" globally and would be unprecedented in New Zealand, but the mechanism through which they would be expected to work is essentially orthodox, rather than unconventional.
But that is just semantics. The important thing is the Reserve Bank has confirmed that when it is talking about unconventional policy tools, it does mean to include negative rates in that terminology and we know where we stand – which is that the Reserve Bank currently thinks them unlikely.
Another development that appears to have calmed nerves in financial markets was Statistic NZ's report the previous week that GDP growth came in at a better-than-feared 0.5 per cent in the June quarter.
As ASB pointed out before the release, in the context of the constantly evolving state of financial markets, that figure really records ancient history.
Or as the bank actually put it, more politely, "New Zealand GDP data is not published in a particularly timely fashion, with the first estimate released nearly a full quarter after the fact".
But the timing has been helpful for the Reserve Bank in trying to exude calm.
Banks aren't really buying it yet, and are still forecasting continued cuts to the OCR into 2020.
A probable rate cut in Australia to 0.75 per cent on Tuesday should reconfirm that view.
Measures of business sentiment should perhaps be treated with a big dose of caution given they are so easily politicised.
But it seems a safe bet that GDP growth has softened considerably since the end of June – by how much, we won't know until December 19.
So the smart money is still on lower interest rates being in the pipeline. But, yes, there is genuine room for doubt.
After all, when the Reserve Bank cut the OCR to 1.75 per cent in November 2016, no-one forecast it would still be sitting there at the same rate more than two-and-half years later – instead banks were mostly predicting a further cut the following year.