• Governor's Feb. 3 speech steered economists away from rate cut
  • Only two of 17 economists in Bloomberg survey predicted easing

New Zealand central bank Governor Graeme Wheeler faced criticism from economists Thursday after delivering an interest-rate cut that took most of them by surprise.

Wheeler’s quarter-point reduction in the official cash rate to a record-low 2.25 percent came just five weeks after a speech in which he signaled no rush to ease further in response to weak inflation. Only two of 17 economists in a Bloomberg survey predicted today’s move, with the remainder forecasting no change.

While the rate reduction was prudent given the risks of inflation remaining stubbornly low, “we also need to give the Reserve Bank of New Zealand a brickbat for the extent of its U-turn,” said Nick Tuffley, chief economist at ASB Bank in Auckland. Wheeler’s Feb. 3 speech “suggested the RBNZ was a long way from contemplating an OCR cut, and will have contributed to the extent of market surprise today,” he said.

The New Zealand dollar plunged more than 1 U.S. cent following the rate cut, which financial markets had assigned just a 30 percent probability. Wheeler also said additional easing may be required, and most economists now predict a second reduction in June.

A spokesman said the Reserve Bank had no comment when asked to respond to the criticism.

In his February speech, Wheeler warned against an “inappropriate fixation on headline inflation” and said the RBNZ would avoid a mechanistic approach to policy that “risks creating serious distortions in the financial system, housing market and broader economy.”

Changed Call

Dominick Stephens, chief New Zealand economist at Westpac Banking Corp. in Auckland, said he changed his call after Wheeler’s address.

“Back in January, we were actually forecasting that the RBNZ would cut at today’s meeting,” he said. “But then the RBNZ governor gave a speech cautioning against focusing excessively on headline inflation. The strong language in that speech seemed to pour water on the idea of an imminent OCR cut.”

Kiwibank senior economist Zoe Wallis, who correctly forecast today’s move, said two key things had changed since Wheeler’s speech: downside risks to the global economic outlook had increased, and a measure of inflation expectations dropped to a 22-year low.

Wheeler said in the speech that further easing may be needed if concerns deepened around the global economy, and that the central bank “would not wish to see inflation expectations become unstable or decline significantly.”

‘Poor Messaging’

Still, Stephen Toplis, head of research at Bank of New Zealand in Wellington, said there’s been “a lack of consistency or poor messaging” in Wheeler’s communication.

“This statement is not consistent with what Graeme Wheeler said in his February speech, and his February speech was not consistent with what they said in the December monetary policy statement,” Toplis said. “We as a team read, re-read and re-read again Wheeler’s February speech and couldn’t work out how he could possibly cut rates in March. That’s where we are getting a little bothered. We’re really struggling to know what process the bank is using to deliver its outcomes.”

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