New Reserve Bank governor Graeme Wheeler will issue his
first official cash rate statement on Thursday with the big
unknown being how his attitude differs from that of his
predecessor, Alan Bollard.
Westpac chief economist Dominick Stephens said in ordinary
circumstances, a preview of the OCR would be "incredibly
At the September Monetary Policy Statement, the central bank
issued a "firmly on hold" outlook for the OCR. In coming to
that view, the Reserve Bank contemplated a weak global
economic environment, modest GDP improvement in New Zealand,
fiscal austerity, rising house prices, the Canterbury
rebuild, low inflation and the excessively high New Zealand
The economic landscape had changed very little since that
time, Mr Stephens said.
"But these are not ordinary times. The Reserve Bank has a new
governor and he may interpret the current economic situation
differently to his predecessor."
Financial markets appeared to have taken the view the new
governor would be more "dovish". Interest rate markets were
increasingly pricing in the possibility the OCR would be
reduced within a few months, Mr Stephens said.
Experience suggested that the person at the top mattered for
monetary policy. The Reserve Bank rapidly changed tack from
OCR hikes to OCR cuts soon after the last change of governor,
surprising markets in the process.
"For what it is worth, our thinking is that the incoming
governor will start his term calmly and cautiously."
The Reserve Bank's target was to keep future inflation close
to 2%, on average over the medium term. Mr Wheeler would be
presented with a staff inflation forecast that averaged "bang
on" 2% for one to three years - the usual target horizon, Mr
The most prudent course would be to keep the OCR on hold and
issue a statement ambivalent about future OCR changes. That
could be achieved by repeating the last sentence of the
September statement: "It remains appropriate for the OCR to
be held at 2.5%".
If market speculation was closer to the mark, and Mr Wheeler
decided that lower interest rates were appropriate, the
October OCR review could be used as a signalling opportunity.
On Thursday, the OCR would be left at 2.5% but strong hints
of future OCR reductions would be given in the accompanying
press release, Mr Stephens said.
Markets were nervous about the OCR review and a reaction of
some sort seemed likely. Current pricing suggested a better
than 50% chance the OCR would be cut by January, he said.
If the Reserve Bank validated that thinking in any way by
hinting at OCR reductions, interest rates could fall sharply
on the day.
"By contrast, if our tentative thinking proves correct and
the Reserve Bank issues a bland OCR review, interest rates
would probably rise slightly," Mr Stephens said.
Labour finance spokesman David Parker said he did not have a
strong view on whether the OCR should stay at 2.5% or be cut.
Although New Zealand interest rates were higher than
elsewhere in the world, further cuts would reduce the
incentive for saving. People were also relying on fixed
interest for income and an OCR cut would reduce their
"The outgoing governor at the last OCR announcement said that
even if interest rates were cut, the exchange rate would not
necessarily drop to reflect the fundamentals of our economy.
"I will be interested to see what Mr Wheeler says in his
first outing as governor."
Mr Parker said the OCR should not be the only instrument
being considered by the Reserve Bank to help the New Zealand
economy suffering from a high dollar.
"But as you know, they are hamstrung by the objectives of the
Reserve Bank Act."