The Reserve Bank is tasked with supporting maximum sustainable employment – yet it's the Bank itself that is most overworked as it delivers today's Monetary Policy Statement.
First, the Reserve Bank was tasked with maintaining inflation around a 2 percent midpoint. That's going to blow out this financial year, which ends next month, and the $20 a week family benefit bumps will boost it further next year.
Then, the Bank was tasked with supporting maximum sustainable employment. The latest much-improved Treasury forecast (the blue line on the chart below) shows unemployment dipping back down to the traditional 4.0 percent marker of effective full employment – well below the 5.0 percent the RBNZ was expecting.
Now, at Finance Minister Grant Robertson's direction, the Bank must assess the impact of today's monetary policy decision on sustainable house prices, by dampening investor demand for existing housing stock.
It's all a bit of a headache for Reserve Bank Governor Adrian Orr, who is back from sick leave and expected to deliver the Monetary Policy Statement this afternoon. Against all his better judgment, he is expected to outline just how the Bank will rein in lending to speculators – and how it will measure its success.
The signals from the Bank thus far suggest he is most likely to turn to debt-to-income lending limits – which would require Robertson to agree to the Bank using the tool in a way that doesn't adversely impact on struggling first home buyers. Robertson would prefer the limits target investors, if they are to be used.
Essentially, the Bank has been more traditionally dovish than Robertson this year. Like other central banks around the world, it has continued to use the tried-and-true tools of low interest rates and funding for banks, to help the economy recuperate from last year's malaise.
Robertson, while still spending money on benefit increases that will flow through into the economy, is easing off last year's borrow-and-spend strategy. That was most evident in his reluctance to commit to new capital spending on infrastructure in last week's "recovery" Budget – spending which had defined the previous year's crisis Budget.
If the Reserve Bank has been providing its ill patient with antivirals and steroids, Budget 2021 showed Robertson beginning to turn his focus to a longer term vaccination strategy.
The question now is whether the Reserve Bank follows his lead, supported by the Treasury's more optimistic economic recovery forecasts, by more data from the Bank and independent sources.
It seems certain the Bank will not raise the official cash rate. Economists agree it's unlikely to even signal a timeframe to do so. So, absent any indication from those monetary policies, the clearest indication that it is staying true to its stimulatory path would be to leave its unconstrained OCR forecast unchanged.
This is a relatively new forecast, which feeds both the OCR and the effects of its large-scale asset purchase quantitative easing programme into one line, on one chart. In its last Monetary Policy Statement, in February, it lifted that forecast line to rise above zero percent from early 2023.
If it does raise that line again, that tells banks and borrowers that it is open to higher long-term interest rates – a path that lenders are already starting to adopt with increases to deposit rates and three-to-five year mortgage rates.
That would bring the bank in line with the Finance Minister, and his apparent belief that the worst of the threat of financial downturn is over, and that a greater threat now is the long-term social and economic harm caused by the housing crisis.
The financial markets and bank economists are anticipating a warming economy, as inflation begins to lead interest rates upwards. The more hawkish would probably raise interest rates now, but most are predicting OCR increases from August 2022.
According to Stephen Toplis and the team of BNZ economists: "Just as surely, the macro-economic trends are pushing the case for less monetary stimulus, as the supply side of the economy looks to be increasingly under duress," says
At Kiwibank, Jarrod Kerr says: "The Reserve Bank will struggle to credibly talk dovish, but the upside is largely priced into the market already with +25bp of hikes priced into August 2022 and +45bp of hikes by May 2023."
Only Westpac, really, is anticipating a later rates hike than that: the economists there predict OCR hikes from 2023, and suggest the Bank should hold still longer.
With no immediate change to interest rates, that leaves the Reserve Bank looking to new drugs to treat the patient. Grant Robertson would like to see it put a stop to interest-only loans, which he worries are being used by investors to leverage the residential properties they own, at great risk to them and to the financial stability of the economy.
The Reserve Bank isn't convinced, as it clearly signalled earlier this month in its Financial Stability Report.
It is more likely to change the settings on the loan-to-value lending constraints (though any further move there may do greater harm to first home buyers) or, most likely of all, announce plans to roll out debt-to-income lending limits.
