• rmacculloch

Did the RBNZ's Deputy Governor just make a mistake? Will his White Heron turn into a Black Swan?

In a recent rambling speech given on 21 September, the Deputy Governor of the RBNZ suggested that only small increments in the OCR were being considered. This is how he described Bank strategy. A “fitting metaphor” for it, he said, took the form of a "kōtuku" (white heron). This bird, which he seems to know a lot about, is prepared to take “considered steps” as it "assesses the environment" - the source of the saying ‘tapuwae kōtuku’ ..“In the world of setting monetary policy, this translates to .. inching in the right direction based on how the economy is likely to evolve.”

Commentators took this "considered-assessment" rather than "sudden-flight mode" speech to "strongly imply" that the Bank "is signaling a series of small increases" in the Official Cash Rate. Which would mean that the Bank is happy for real interest rates (which equal nominal rates minus inflation) to drop even further. How come? Since the yield on government stock with a maturity of one to two years in NZ is only a little over 1 percent whereas the inflation rate has sharply risen to around 5%, with expectations of future inflation set to soar. Consequently, real returns may already be deeply negative, as little as minus 3 to 4 percent. Making borrowing ever more attractive.

Within weeks of the Deputy Governor making his "considered steps" speech, ANZ economists have hit the headlines today, saying they "now expected annual inflation to reach 5.8 per cent by March next year" and that "the RBNZ could no longer be gradual & cautious in tightening policy". Which raises the question: how come the RBNZ is so quickly having to eat its words?