Forecasts not commitment - RBNZ

The RBNZ’s campaign to explain its monetary policy actions continued in a speech by Assistant Governor John McDermott today.

Speaking at the Goldman Sachs Annual Global Macro Conference in Sydney, McDermott said that the RBNZ is very open about its monetary policy outlook as it believes transparency makes for better policy.

It publishes a forward projection for the 90-day interest rate, comments on the outlook for policy, provides discussion of risks in its Monetary Policy Statements (MPS), and presents alternative scenarios.

The RBNZ’s regular forward guidance on interest rates supports the effectiveness and accountability of its monetary policy actions in a number of ways, he said.

“It can help individuals and businesses make more informed decisions. Also, the projection can help shift a broad range of interest rates towards levels consistent with medium-term price stability.”

For example, publication of the 90-day interest rate projections provide analysis on the state of the economy and illustrate how events have shaped the RBNZ’s outlook for policy.

McDermott said this supports transparency and contributes to financial market participants’ understanding of how the RBNZ responds to unexpected economic events.

“If market participants have a good understanding of our ‘reaction function’, and share similar views on the economy, interest rates should adjust to levels consistent with medium-term price stability without the need for constant comment and intervention from the Bank.”

However, the RBNZ projections are conditional and reflect the many challenges faced in forecasting the New Zealand economy, he said.

For example, since early 2014, unforeseen economic events led to weaker-than-expected inflationary pressure in the economy.

In response, the RBNZ significantly revised down the outlook for short-term interest rates.

McDermott said the RBNZ will continue to adjust monetary policy as conditions evolve to ensure that price stability is achieved over the medium term.

“But it is important market participants understand that these forecasts are not a commitment to a certain path of policy.”

Market participants do generally have a good understanding of the conditional nature of the RBNZ’s forecasts, he added.

McDermott’s speech follows Reserve Bank Governor Graeme Wheeler’s speech to the Canterbury Chamber of Commerce yesterday.

In his speech, Wheeler said that flexibility was key to the RBNZ’s monetary policy.