The Bank and the markets are on the same page

First thing you notice about today's Monetary Policy Statement?

Well, maybe the second thing, after the wholly expected news that the official cash rate or OCR will be staying where it is for quite a while yet, as (for example) all 13 folks surveyed on the Finder OCR preview page had anticipated.

The possibility of an OCR cut is now remote. The February Statement had said, "The Committee agreed that it remains prepared to provide additional monetary stimulus if necessary and noted that the operational work to enable the OCR to be taken negative if required is now completed". The April Review had said, "The Committee agreed that it was prepared to lower the OCR if required". And in this one? Any cut to the OCR has been taken out the back and quietly buried. Which makes complete sense: the futures market has already moved on and has been signalling no further cuts for a while now.

We're back to the good old days when the Bank published a projection for the OCR, rather than the notional "unconstrained OCR" construct it had been running with in recent Statements. And here it is.

As the Bank says (p17), "This projection is conditional, in that it communicates the policy path required to meet our monetary policy objectives subject to the economic outlook and the assumed impacts of other monetary policy tools", and it is not "forward guidance", or the Bank's formally tipping its hand about likely future moves, and if the outlook changes the projected OCR path will, too. But all that said, it's the best take we've currently got on what the Bank is likely to do next. It also agrees with what the markets were expecting, which was an OCR hike of 0.25% around the middle of next year and another one by the end of 2022..

On the Really Big Question that is bothering central banks right now - are current signs of inflationary pressure a signal of permanently higher inflation down the track, or will they go away as (eg) Covid effects wither away? - the Bank has come down largely on the temporary side: 

"The Committee discussed the risk that these one-off upward price pressures may promote a rise in more general inflation and inflation expectations. However, the Committee agreed that these risks to medium term inflation were mitigated by ongoing global spare capacity and well anchored inflation expectations" (p3), and

"we expect the broader impact on consumer price inflation to be moderate and temporary. Our projection assumes that goods supply-chain bottlenecks begin to ease in late 2021, and dissipate gradually over 2022. There are already tentative signs that the strong global demand for goods is abating, as easing of public health restrictions abroad is lifting demand for services such as eating out and travel. In addition, we expect labour shortages will lessen as border restrictions ease and more workers are able to come into New Zealand" (p28)

though if the Bank's wrong it will have to do something about it, or as it put it (p19), "there is some risk that the change in prices is more persistent and leads to ongoing inflationary pressure. Consistent with the [Monetary Policy] Remit, the MPC [Monetary Policy Committee] would be expected to respond to ongoing inflationary pressure if it were perceived as being inconsistent with the inflation target".

One bit of good news in the Statement is that while we are not in completely calm waters yet, some of the extreme risks around the economic outlook have dissipated: "Confidence in the outlook is rising as the more extreme negative health scenarios wane given the vaccination progress globally. We remain cautious however, given ongoing virus-related restrictions in activity, the sectoral unevenness of economic recovery, and the weak level of business investment" (p2). 

On Covid, the Bank is operating on the basis that "New Zealand is assumed to remain at Alert Level 1 or a lower level of restrictions over the projection ... Border restrictions are expected to begin to ease more broadly from the beginning of 2022. The majority of New Zealand’s adult population is assumed to be fully vaccinated by the end of 2021" (p34).