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Speech by RBNZ's Dr Brash - 26/01/01

Data Flash (New Zealand) NZ: Speech by RBNZ's Dr Brash - 26/01/01

Key Points

RBNZ Governor Brash gave his annual speech to the Canterbury Employers' Chamber of Commerce.

The speech was entitled `Making monetary policy: a look behind the curtains'. In the main, the speech focused on the process that precedes the publication of a monetary policy statement i.e. the gathering of information, the compilation of forecasts, how the forecasts are used in arriving at a policy decision etc. Dr Brash also made a point of noting that while he is solely accountable for monetary policy decisions, he draws on comprehensive advice.

Governor Brash also wrapped up his speech by reiterating the key points from Wednesday's policy statement. That is, since the publication of the December Monetary Policy Statement, a number of factors had occurred to moderate the inflation outlook. These factors included a weaker world economy, a faster-than-expected retreat in petrol prices, as well as the rebound in the NZD.

Dr Brash commented that "it should be, and indeed is, unusual for a Bank monetary policy decision to surprise financial markets". This comment was made in the context of the Wednesday's policy decision, which was anticipated unanimously by markets.

Of greater relevance, in our view, Dr Brash also commented that "that does not mean that the Bank should be a prisoner of the markets' view: there will be occasions when the Bank will differ from the view of the market.' Following the speech, when reporters asked why he had not cut rates on Wednesday, Dr Brash replied that confidence had rebounded strongly and that the NZD remained stimulatory, despite the recent appreciation. As a result, a cut in interest rates would not be appropriate at this time.


Given prevailing market sentiment, the market latched onto the more dovish elements of Dr Brash's speech, the short bill contracts rallying several ticks. As was our view following Wednesday's policy statement, we believe the market is premature in assuming that the RBNZ has already moved to an easing bias. We think that the Bank is genuinely uncertain about the direction of the next move in interest rates, and will be watching both local and international data closely over the next few weeks as it begins to compile the inflation forecasts which will underpin its 14 March MPS decision.

Based on the current state of knowledge, we continue to believe that the Bank is unlikely to cut rates as early as March. As noted above, Dr Brash pointed out that a cut in interest rates would not be appropriate at present given the current strength in business and consumer confidence and the still stimulatory exchange rate. We would add to that list tentative signs of a pick-up in consumer spending and housing activity, and little evidence that medium-term inflation threatens to fall sustainably below the 1.5% mid-point of the inflation target range. We think that Dr Brash will confront the same set of circumstances when he makes his next decision on 14 March, and would thus expect him to reach the same conclusion.

We would not rule out an easing at the May Monetary Policy Statement if developments offshore continue to deteriorate markedly. However, our central scenario envisages New Zealand celebrating 1 year of unchanged interest rates in May, with the likelihood that the Bank leaves rates unchanged for most of this year.

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