Playing the man not the ball

In our assessment, the main message from the Monetary Policy Statement was to reiterate that it is the outlook for future inflation that determines policy decisions.  It is a reminder to remain focused on the economic signals – to avoid playing the man not the ball.

Only a couple of bank economists picked that the RBNZ would cut interest rates last week, with market prices only assigning a 20% probability on the OCR being cut to 2.25%. 

Most pointed to the Governor’s speech on 3 February as a factor that deterred them from expecting a cut in interest rates at the next meeting in March.  In that speech, the Governor noted that it would be wrong for the RBNZ to take a “mechanistic approach” to current low headline inflation, as that would not draw on the flexibility in the Policy Targets Agreement (PTA).  This was taken as a definitive and timeless indication that the Governor was a so-called “reluctant cutter."

In large part, that segment of the speech was aimed at politicians and other members of the public that had taken a simplistic approach.  It served to remind them that the RBNZ can only influence future inflation, not current or past inflation.  What went largely ignored was the rest of the speech, which detailed at great length all the downside risks from the global economic outlook.  This came hot on the heels of the January OCR Review where the RBNZ had moved to an official easing bias.