Chief economist update: Same challenges, differing reactions

Deemed the sexiest accent in the world by 'Big 7 Travel', it would have been better (dare I say, sexier) that instead of a printed statement, Reserve Bank of New Zealand (RBNZ) Governor Adrian Orr verbally delivered the news that: "The Official Cash Rate (OCR) has been reduced to 1.5%."

"The Monetary Policy Committee decided a lower OCR is necessary to support the outlook for employment and inflation consistent with its policy remit."

Under the remit signed on 14 February 2019, the Reserve Bank's operational objectives for monetary policy are to: "Keep inflation between one and 3% over the medium term, with a focus on keeping inflation near the 2% mid-point; and support maximum sustainable employment."

This is more or less the mandate targeted by every other major central bank around the world, including New Zealand's next door neighbour, Australia.

But while the Reserve Bank of Australia (RBA) sees, rightly or erroneously, the economic glass half-full - as implied by its decision to keep the official cash rate unchanged at 1.5% and its monetary policy unchanged at neutral only a day before the RBNZ meeting - New Zealand's central bank opted to just do it, cut the official cash rate and forward-guided markets that there could be more rate reductions to come.

Table 6.1 "Key forecast variables" from the "Monetary Policy Statement, May 2019" release shows the RBNZ expects the OCR to drop from 1.8% in March 2019 to 1.4% by March next year. This compares with the bank's February prediction for steady interest rates (at 1.8%) before it's lifted to 2% in March 2021.

Just like its Australian counterpart, the slowdown in global growth and trade war concerns has negatively impacted New Zealand's economy.

Just like Australia, New Zealand's labour market remains strong. The country's unemployment rate has trended lower since the 6.7% high recorded in the third quarter of 2012 to a near 10-year low of 4.2% in the March 2019 quarter.

With regards inflation, both the RBA and the RBNZ remained faced with below-target inflation. NZ core inflation is 50 bps below target - 1.5% versus 2% - Australia's core inflation, measured as the average of the weighted median and trimmed mean gauges, is off-target by more - 1.4% versus 2.5%.

The differing reactions by the RBA and the RBNZ to almost the same global and domestic challenges and economic conditions becomes a test on whether optimism (RBA) is sufficient to turn the economy around or more concrete and swift action (RBNZ) is required to stem the slowdown in activity and return inflation back towards target.

Read more: RBNZReserve Bank of AustraliaReserve Bank of New ZealandAdrian Orr
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