All eyes on Orr in lead-up to OCR call

Thursday’s monetary policy statement (MPS) is the most keenly anticipated Reserve Bank outing in many months – but it’s due to the new Governor, not the OCR outlook.

Friday, May 4th 2018, 1:26PM

by Miriam Bell

TMM’s regular OCR preview survey reveals that economists are united in their expectation that the OCR will stay on hold at its record low of 1.75% next year.

In a similar vein, most are not expecting the Reserve Bank to significantly change its OCR outlook and neutral stance or its inflation forecasts.

But the fact that it will be the Reserve Bank’s new Governor, Adrian Orr’s, first MPS and OCR announcement did prompt much speculation, particularly given Orr’s open communication style.

Westpac chief economist Dominick Stephens says the MPS will reveal a great deal about Orr’s style and how the OCR will be affected by the new Policy Targets Agreement (PTA).

They don’t expect a change in the OCR outlook, but whether or not the Reserve Bank sticks with the same bottom-line guidance it has used of late is uncertain, he says.

“Orr might want to emphasise continuity, he might want to stamp his own style, or he might have a genuinely different take on the economy that prompts a change in stance and communication.”

Bancorp Treasury senior economist Peter Cavanaugh doesn’t expect Orr’s arrival to prompt a significant change in stance.

“It is too early for the new Governor to ‘stamp his mark’ on Reserve Bank monetary policy. Rather I expect a subtle shift in language and emphasis.”

BNZ head of research Stephen Toplis agrees, saying those looking for a radical shift in the stance of the Reserve Bank will be disappointed.

“Yes, there will be subtle nuances and, it goes without saying that Adrian Orr’s presentation style in the post MPS news conference will be more dynamic than his predecessor. But a change in direction? No!

“Orr is open, articulate and sometimes very humorous but he’s still, at his core, a relatively mainstream economist who has already committed himself to price stability with a focus on the mid-point of the Reserve Bank’s target band.”

For that reason, BNZ expects that the broader framework for the Reserve Bank’s analysis will be unchanged from that of the February MPS and March OCR review.

Overall, survey respondents thought the Reserve Bank was likely to retain consistent in its messages around monetary policy, but that Orr would bring greater transparency and openness to the thinking and discussion around it.

Next week’s MPS is also the first one since the signing of the new PTA, which includes employment objectives, and, as such, survey respondents are also keen to see how that is reflected in the MPS.

ANZ senior economist Liz Kendall says it will lead to greater focus on labour market developments in the Reserve Bank’s deliberations and communications.

“But, in our view, it will not alter the outlook for monetary policy much, if at all.”

This time round, given the balance of risks, she expects the Reserve Bank will retain a cautious approach, with the policy outlook little changed.

In ASB chief economist Nick Tuffley’s view, employment conditions are good and don’t indicate the Reserve Bank needs to relax its monetary policy stance.

Recent economic data suggests there will be little change to the Reserve Bank’s outlook generally, although the inflation outlook could be slightly lower in the near-term, he says.

Nearly all the survey respondents believe the OCR has troughed in this cycle and that the Reserve Bank’s next move will be to hike it.

Most picked the second half of 2019 as the likely date for a hike, although both Kiwibank’s Jeremy Couchman and Infometrics Ltd’s Brad Olsen are picking the first half of 2019.

But TD Securities head of Asia-Pacific research Annette Beacher says the Reserve Bank needs to start hiking the OCR and is picking November this year for a hike.

Tags: ANZ ASB BNZ interest rates Kiwibank OCR OCR forecasts RBNZ Reserve Bank Westpac