Analysis: RBNZ Hawkesby on How Deeper Reading of Market Signals Led to 50bps Aug Cut

By Sophia Rodrigues

Central banks are always interested in hearing from market about what they should do but might instead hear what they think the central bank “will do.” This could lead to a monetary policy error, unless the central bank carefully analyses the market signals for more than just a guide to what their expectation is.

This is exactly what the Reserve Bank of New Zealand did in August when it delivered a “surprise” 50 basis points cut in the official cash rate when market expectation was for 25bps cut.

RBNZ assistant governor Christian Hawkesby talked about this in a speech on October 29 where he explained how the August decision was a “tactical” one because the RBNZ listened more to market expectations of their ability to achieve the inflation objective, rather than just focusing on what the market was expecting them to do with the OCR.

In doing so, the RBNZ wanted to send a signal to the market that it was determined to ensure inflation increases to the mid-point of the target band because market’s own signals showed they didn’t believe the RBNZ was committed enough.

“We felt this commitment should support a lift in inflation expectations and an eventual lift in actual inflation,” Hawkesby said.

A key part of the listening process was looking closely to market measures of inflation expectations, that is, inflation break-evens.

While such measures can be influenced by other factors such as risk premia and illiquidity discounts, the fact that both market measures and survey measures had been drifting lower through the year meant that the RBNZ paid closer attention to what it was signalling.


Hawkesby’s speech was titled, “Speaking, listening and understanding: The art of monetary policy communications,” and it is a very interesting read for anyone wanting to gain a deeper understanding of central bank communication, and the trade-offs and challenges they face.

Hawkesby talks about the conundrum every central bank faces: Should they be too explicit in their communications, or should they speak in a whisper?

It seems there is a risk with doing either.

“The more we communicate and try to influence market pricing of future OCR decisions with strongly signalled messages, the more market pricing can merely reflect what we have said,” he said.

And if a central bank speaks in a whisper, market might lean in to hear better, leading to the whisper getting amplified.

In both the cases, the danger is markets end up paying too much attention to the central banks’ communications, and less on incoming data which would tell the central bank what they “should do.”

“As a central banker, I am far more interested in listening to what ‘we should do’,” he said.


One very interesting example Hawkesby gave in the speech was in relation to central bank transparency through the projections that they publish on interest rates. RBNZ is one such central bank.

According to Hawkesby, one of the limitations of publishing projections is that it can create a disincentive for policy makers to change their view and adapt even as new economic data and developments emerge.

He hinted that might have happened back in late-2014/early-2015 when the RBNZ took longer to change stance after tightening the OCR four times in the first half of 2014, and signalling a tightening bias.

“I think the more interesting question is whether publishing a projection with a very strong tightening bias over the period ahead had an influence on how long it took to adjust once the global outlook and domestic data weakened quickly through 2014,” Hawkesby said.


He ended his speech with a hint that any so-called unconventional monetary policy that the RBNZ might need to use in future would be “less conventional” rather than “unconventional” as many expect.

“There are plenty of communication challenges ahead, especially if monetary policy in New Zealand moves into a less conventional territory, and we end up adopting new tools and approaches,” he said.