Accentuate PRHarbour Navigator - The Return of ‘Open Mouth Operations’ by the RBNZ
Harbour Asset Management, Wellington, 31 January 2013:
As expected, the RBNZ’s Official Cash Rate (OCR) was left unchanged at 2.50%, and we continue to expect the OCR will remain unchanged for some time yet.
What we learnt today is that, in the meantime, the new Governor is not afraid of attempting to implement policy through ‘Open Mouth Operations’ targeted at the NZD dollar and NZ house prices.
Traditionally central banks have moved interest rates and exchange rate using so-called ‘Open Markets Operations’ (OMOs), injecting or withdrawing liquidity from the market. The term ‘Open Mouth Operations’ was coined by a couple of top New Zealand economists in the 1990s to explain how central banks deliberately talk asset prices up or down.[1] We saw this strategy in action today, applied to the NZ dollar and NZ house prices:
- After previous attempts to talk down the currency through 2012, the RBNZ had remained relatively silent in recent Monetary Policy Statements and OCR reviews. That changed today with an explicit reference to “the high currency... undermining profitability in export and import competing industries.” This comes closely on the heels of the disclosure yesterday that the RBNZ sold NZ$250m in the FX market in recent months. The RBNZ would clearly like to see the NZD lower.
- There was also a comment that “the Bank does not want to see financial stability…risks accentuated by housing demand getting too far ahead of supply”. Outside of an acute financial crisis, it is extremely unusual for the Bank to refer to its financial stability objectives in a statement designed to explain its monetary policy decision. We expect a framework for macro-prudential tools will be introduced this year, starting with a Memorandum of Understanding (MoU) with the NZ Treasury and public consultation in March. [2] In the meantime, the RBNZ would clearly like to see the housing market cooling off.
For all the talk in today’s statement about the RBNZ’s preferences, the reality is that they left the OCR unchanged, and concluded that they project “(inflation to come) slowly back towards the 2 percent target” from its current decade low. We think today’s statement was designed to stop the market pricing in rate cuts. In our view, the prospects of a rate hike or introducing macro-prudential tools that actually bite are some way off.
Disclaimer available
[1] Harbour Research: “Will the RBNZ use macro-prudential tools to cool the housing market?”, Jan 2013.
[2] “Market-Implemented Monetary Policy with Open Mouth Operations” by Julian Wright and Graeme Guthrie, Journal of Monetary Economics, 46, 2 (2000), pp. 489-516.