Bank economists all over the place

"No surprises" has become something of a tenet of monetary policy over the past few years.

The regular six-weekly Official Cash Rate reviews are eagerly anticipated by banks, those of us with mortgages, and the small group of us who watch policy developments. Generally though, by the time Reserve Bank governor Don Brash makes his announcement it is usually pretty clear which way, if at all, interest rates are to move.

And while Dr Brash’s quarterly monetary policy statements (MPS) contain a welter of economic analysis and comment – and these can contain the odd surprise – this material is in the nature of what lawyers call obiter dicta - of much interest but not part of the main judgment.

The central bank is going to find it hard not to surprise some on Wednesday when it releases its latest monetary policy statement and official cash rate review.

It’s been a long while since the advice to Dr Brash from the economists on the sidelines has been so varied. Generally, this close to the release of the MPS, bank economists have reached a clear line of thought on which way any moves on the interest rate will go, even if there is often a powerful minority dissenting to the prevailing view.

This time the bank economists are all over the place. While business lobby groups are, as always, calling for Dr Brash to emulate his offshore counterparts and cut the official cash rate from its present 5.75% level to 5.5% or lower, the banks are divided.

The labour market data released in recent days would seem to suggest that inflationary pressures are rising, but as Bancorp economist Stuart Marshall has pointed out, the labour market is not tight compared to most of the countries we like to compare ourselves to.

"There is no inflationary scare here, and if the currency could be forgotten, the Reserve Bank would have no excuse for not taking a more aggressive easing stance.

"But the currency is still down; and the Reserve Bank will still be reticent."

Back in its last MPS, the bank was still bullish about the international situation, and this was expected to flow through to the New Zealand economy (or those parts of it not experiencing the export-led growth) towards the end of the year.

The latest consensus forecasts, however, show a drop in world growth.

They have yet to flow through to New Zealand businesses and the latest confidence surveys show the mood is more upbeat, and, collectively, businesses have a higher level of investment intentions over the coming year than they have had for some time.

As UBS Warburg economist Roger Clement has observed, the channels through which the global slowdown would normally impact the New Zealand economy are not operating as they normally would.

However that dip does come, it could be accompanied by a locally induced lag on economic growth – the drought.

Low rainfall has caused the southern hydro lakes to drop, and if these remain low the need to make further power savings is likely to cause a dent in the growth profile.

And if the drought continues it will also mean a lean spring for many farmers. The production lag from this will take a while to feed through to the figures, but it will come.

All this points to Dr Brash having a lot to say on Wednesday – but if you were a betting person, you’d take a punt on him leaving interest rates where they are.

Rob Hosking is a Wellington-based freelance writer specialising in political, economic and IT related issues.

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