Analysis: RBNZ Orr’s Comment Clearest Signal Negative OCR Off The Table

• Published on
• 26 Nov 2020, 03:49 PM

By Sophia Rodrigues

At the media conference on Wednesday, the RBNZ Governor Adrian Orr made a remarkable comment, “I don’t believe we ever said we are going to be implementing a negative OCR.”

It is the clearest indication from the RBNZ that it has not just backed off from negative rates but in some ways reneged from its implicit commitment.

The RBNZ might disagree, so here’s an analysis of its language since March.

CENTRAL BANKS ARE NEVER EXPLICIT

What Orr said was a statement of fact because the RBNZ never said it will implement negative OCR but then no central bank makes such an explicit commitment. What central banks do do is make statements that steer market in the direction of their thinking.

So did the RBNZ steer markets towards negative interest rates or did markets (including RBNZ-watchers and economists) read too much into its published statement and comments since March.

To understand this, it is important to once again read the RBNZ’s March 16 statement and minutes. The RBNZ lowered the OCR 75bps to a record low of 0.25% and said it “will remain at this level for at least the next 12 months.”

The forward guidance was made in an environment of falling interest rates when a central bank’s aim is to prevent any expectation of rate hikes.

So, the only way the guidance could be interpreted is that the RBNZ was saying the OCR could be kept unchanged or lowered after 12 months. But then the RBNZ provided an explanation on its forward guidance saying it “would also provide clarity to financial market participants that a negative OCR would not be implemented over this period.”

If the two statements are put together, it suggests the RBNZ was open to lowering OCR to negative, but it wouldn’t do it for at least 12 months because the financial system was not operationally ready.

Importantly, it suggests the only hindrance to negative OCR was the lack of readiness of the financial system.

MPC’S PREFERENCE WAS NEGATIVE OCR

Since then, the RBNZ has discussed negative OCR at all the monetary policy reviews. In August it also specifically mentioned its forward guidance as one of the reasons that helped lower longer-term interest rates.

It also said, “The Committee expressed a preference for considering a package of a negative OCR and a ‘Funding for Lending Programme’ in addition to the current Large Scale Asset Purchase (LSAP) programme. The Committee instructed staff to prepare advice on the design of a package for deployment if deemed necessary, taking account of the operational readiness of the financial system.”

In central bank parlance, this is the farthest they get in terms of signalling their intentions to the market.

So, one can conclude the RBNZ steered the market in the direction of negative OCR. If this is true, then the question is whether the RBNZ deliberately misguided the market to achieve lower interest rates or it genuinely believed it would lower the OCR to negative at some stage.

Last month at a conference, Assistant Governor Christian Hawkesby was reported by agencies as saying the RBNZ guidance was not a game of bluff, in response to a question on whether it was merely using the threat of negative rates to put downward pressure on the New Zealand dollar.

This means the RBNZ did not misguide market but genuinely believed it would likely lower OCR to negative sometime next year.  

HOUSING MARKET IN, NEGATIVE OCR OUT

There is nothing wrong with a central bank believing it would take a course of action in future because they know that they can change their minds when circumstances changes. But it is important they remind markets there is a conditionality attached to it because it is easy for markets to lose sight of that.

Where the RBNZ erred was that it put more emphasis on the operational readiness of the system rather than making it clear negative OCR would be implemented only if conditions warrant. Where markets (including economists and watchers) erred was putting less emphasis on “if conditions warrant.”

Very recently, the latter part has become important.

Strong growth in house prices is now a new risk the RBNZ must manage. While such a risk is best managed by macro-prudential tools, leaving monetary policy to continue to focus on inflation and jobs, it is still not an environment where a central bank could push official cash rate to negative.

This means the RBNZ will have to wait and watch how the housing market evolves once macro-prudential tools are imposed. Once that risk settles, any conversation on negative rate would depend on how far it is from its inflation and employment goals.

For now, negative OCR is off the table and Governor Orr said so when he made additional remarks, “We’ve always said we want to be operationally ready to be able to implement an (negative) OCR. It’s been everyone else’s forecasts as to when that may or may not happen.”

It is not an explicit comment by him but with central banks it’s always implicit when it comes to language.

--Contact: Sophia@centralbankintel.com