RBNZ board says the central bank's OCR reviews in the past year 'met the requirements'

By David Hargreaves

The Reserve Bank got a tick from its board again this year over management of the Policy Targets Agreement with the Finance Minister – despite again missing its inflation target as set out by the PTA.

In the central bank’s 2016 annual report the board, chaired during the year by former RBNZ Deputy Governor Rod Carr, noted that inflation outcomes had been below the lower bound of the 1% to 3% target, “but in every case the projected medium-term inflation outcomes have been consistent with the target on the basis of the information available at the time”.

The board’s report, signed by Carr and then deputy chairman Keith Taylor, said the board discussed papers outlining the Bank’s thinking on the potential impact of different Official Cash Rate paths and the “trade-offs” involved with a potentially faster return to the mid-point of the target band, the 2% which is now explicitly targeted by the bank.

“These discussions have highlighted the risks and uncertainties that the Bank is endeavouring to balance, and the judgement that is required in choosing between a number of policy actions that might be consistent with the PTA.

“Directors also discussed issues raised in the Bank’s recent on-the-record speeches, Bulletin articles and Analytical Notes on current monetary policy developments.

‘Met requirements’

“On the basis of the information and advice available to the Governor at the time of his decisions, the Board assessed that the four MPSs and the intervening OCR reviews met the requirements laid out in section 15 of the Reserve Bank Act.”

This is a somewhat milder statement than appeared in last year’s annual report, published at a time when the bank was in the middle of reversing four (it turned out unnecessary) hikes in interest rates made during the 2014 calendar year. Then the board said: “In the Board’s view, the Governor’s decisions, in light of information available at the time they were made, have been consistent with the PTA, which allows for temporary deviations from the target range arising, for example, from large commodity price changes. We judged that, on the basis of information available to the Bank, the Governor made appropriate monetary policy decisions, and each MPS met the requirements laid out in section 15 of the Reserve Bank Act.”

The RBNZ announced earlier this week ahead of release of the annual report that Carr, whose term on the board doesn’t expire till next July had stood down as chairman to be replaced, as of September 23, by current board member Neil Quigley. Taylor, whose term expires in 2019, was replaced by Kerrin Vautier.

There’s no mention of these developments in the report itself.

The board report does however state – in a departure from previous report formats – that “Directors were assisted in their quarterly assessments of [Monetary Policy Statements]  by a written commentary by director Professor Quigley”.

And in the adjoining section on financial stability the report states: “Directors were assisted in their assessment by a written commentary by director Ms Vautier.”

Letter of expectations

In what was largely seen as a stepping up of pressure on the RBNZ regarding not meeting its inflation targets, Finance Minister Bill English sent a ‘letter of expectations’ to the RBNZ board toward the end of last year.

The RBNZ board report in the latest annual report states: “The Minister of Finance’s first Letter of Expectations addressed to the Board, received in November 2015, has been used to provide structure for our report this year.”

In his report on the year Wheeler says Inflation has remained lower for longer than forecast, primarily because of unforeseen and unforeseeable global events.

“Inflation in the tradables sector, which accounts for almost half of the CPI regime, has been negative for the past four years. This has been due to the subdued global inflation, falling global commodity prices and the high New Zealand dollar exchange rate. Given the outlook for global inflation and policy interest rates, low tradables inflation appears likely to continue for some time yet.”

He reiterated that Inflation in the “non-tradables” sector has averaged 2% in the past two years.

Dollar bites

The RBNZ itself has not escaped the impact of the strong New Zealand dollar in the past year, with the net surplus falling to $52 million from a chunky $624 million surplus in 2015. The RBNZ said a higher NZ dollar at year end 2016 resulted in a $201 million loss from foreign exchange rate changes on the Bank’s open foreign currency position in 2016, compared with a $379 million gain in 2015.

The central bank pays surplus equity to the Government as a dividend and has provided for a dividend of $140 million for 2016, paid this month.

The RBNZ says the dividend is calculated and sourced from realised earnings.

“Because, under the dividend principles, unrealised gains are generally not distributed, the amount of the dividend may differ from the surplus for the year. The 2016 dividend is lower than the $510 million dividend paid in 2015. The 2015 dividend was unusually high due to the large surplus, that allowed realised gains from 2014 to be distributed in 2015. In 2014 these gains were retained to bolster equity and offset unrealised foreign exchange revaluation losses.”