The Reserve Bank has modelled a scenario in which it cuts the Official Cash Rate by 100 points if GDP growth stays below three percent over 2019.
The dramatic scenario was included in the bank’s August monetary policy statement released this morning, alongside a projection that it will hold the OCR at 1.75 for a whole year longer than it projected just three months ago.
That MPS also shifted back its projection for a rate hike, but only by a quarter.
Whites of the eyes
At the post-MPS press conference, Adrian Orr stressed that the takeaway from the change in outward projection is that the OCR will stay “low for longer” .
He reiterated that the Bank still sees the balance of risks being evenly weighted up or down. This has been a consistent theme of Orr’s OCR setting decisions.
“The balance of risks have become very even on the way through about up or down so we are just in no rush to be moving,” Orr said.
He said slower economic growth had given the RBNZ confidence that there was not immediate capacity pressure leading to rising inflation, hence pushing out the bank’s inflation outlook.
The bank has also pushed out its projection for when the stimulus from the KiwiBuild programme will be felt, consistent with the Government’s Budget and advice from Treasury. It now expects the effects of KiwiBuild to be felt towards the end of 2019.
The RBNZ will not begin to raise rates until it sees this inflation. Orr noted he was positively surprised at measures of core inflation ticking up to the mid-point.
He said the bank hoped to move away from a stimulatory monetary policy back to neutral, which the bank estimates to be an OCR of 3.5.
Maximum sustainable employment
Orr was also asked about his thoughts on maximum sustainable employment. He is the first New Zealand to wield a dual mandate, taking into account both price stability and supporting maximum sustainable employment.
Orr said that the bank didn’t know what maximum sustainable employment was, but he personally hoped the current rate was not the maximum.
“All we have is some reasonable historical estimates of a wide range of measures around something that we would call sustainable employment,” Orr said.
Unemployment is currently at 4.5 percent, but Labour has said it hopes to get unemployment below four percent.
Unemployment fell below four percent in 2007, before the financial crisis.
Shoot for the moon, land among the stars
Orr also reiterated that the Bank targets an inflation range. The Bank is tasked with keeping inflation between one and three percent, but to try and average two percent over the mid-term.
Orr compared the two percent target to a dart board, saying the Bank aims for the middle so it can land within the range.
“We target a range of between one and three percent, we try to target two,” Orr said.
“But of course it’s the full range that we are targeting and there will be noise coming through this,” he said.
The bank has faced criticism from some economists including Shamubeel Eaqub on Newsroom for tending to aim for the lower end of the target range.
Bank Review in “full swing”
Orr also spoke briefly on the Reserve Bank’s review of trading banks conduct and culture, which began earlier in the year in the wake of the Australian Royal Commission into banking and financial services.
He said the review was “in full swing” with reviews completed on three of the four major banks and offered his congratulations to banks for the open and transparent process.
He said the regulation team had spent two or three weeks in each of the three banks.
Board members and executives as well as branch sales staff had been spoken to.
He said the review would be completed in mid-October. It will be made public.