Official Cash Rate decisions are meant by law to only take account of economic factors - not political ones. Yet in a speech I heard former Finance Minister Steven Joyce give last night, he said he smelt politics in the Reserve Bank's announcement that although the Official Cash Rate went up, the Governor said 5.5% would be "the peak" and that he anticipated cuts from the third quarter of 2024. That call surprised markets with its softer approach.
Why tell Kiwis there will be no more rate increases and that instead rates will be coming down shortly? To help reassure voters that they are safe voting for Labour since the economy is back on track, of course. Steven Joyce was right.
What the RBNZ did was to issue what is known in the trade as "forward guidance". Its becoming discredited. Why? Kristin Forbes, a Professor of economics at the Massachusetts Institute of Technology, said "forward guidance locks central banks into policy. Recent experience, she said, shows central banks need to keep options open. It becomes harder to pivot as economic situations change when you’ve issued forward guidance". That is, forward guidance can easily destroy credibility, which means doing what you say you will do.
The RBNZ is desperate to avoid the scenario that Labour goes into the election with the prospect of future rate rises hanging over peoples heads. Now the Finance Minister & PM can tell voters that rates are on the way down since that is what the Governor has formally stated. The Governor's announcement was a requirement for Labour to have a realistic chance of winning the election.
Even if there was no direct communication between the Finance Minister, or PM, and Governor on this topic, I'd expect the Governor knew his announcement of no-more-anticipated-increases-and-instead-cuts in the OCR was exactly what they wanted to hear. It's silly guidance to give in the context of the current volatility. Who knows whether there will be more oil & food price shocks, or weather events that could push up inflation again this year?
Seems Governor Orr knows how to forecast the weather, read Putin's mind and has a hotline to the Supreme Leader of Iran and King of Saudi Arabia.