Thursday, 21 November 2019

Small mystery solved

Here is the table from the latest Monetary Policy Statement that shows the Reserve Bank's projection for the official cash rate (the OCR).

There's something odd. If you look at the projection for March '20 through to June '21, you see that the OCR is projected to be 0.9% for six quarters in a row. But how can that be? The RBNZ won't be setting an 0.9% OCR: it might set 0.75%, it might set 1.0%, but it won't be setting 0.9%.

If you're a monetary policy tragic, maybe you already know the answer. But I didn't. So I asked the RBNZ what was going on. And the very helpful Chris McDonald, manager of forecasting at the Bank, enlightened me.

The projection is actually what the Bank thinks, via its modelling, is what the OCR needs to be to achieve 2% inflation. The Monetary Policy Committee will make its own tactical OCR call at each policy decision point, and you'd imagine it wouldn't be a million miles away from the level the Bank's models say is the right level, but the projected path isn't actually a stab today at what those decisions will be.

I gather I'm not the first to wonder what that 'projection' meant. Future tables may well include some footnoted explanation.

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