Janet Yellen, chair of the world’s perennially most-powerful central bank, and Graeme Wheeler, governor of the 2015 ‘Central Bank of the Year’, issued monetary policy statements within hours of each other last week. Christian Hawkesby, Harbour Asset Management head of fixed income, explains why the issue time is about all the two central bank statements had in common
As expected, both the RBNZ and the US Federal Reserve left interest rates unchanged last week following their policy meetings. However, the key news was that their statements pointed to very different outlooks. While the US Fed retained a tightening bias, the RBNZ moved to an easing bias. For those investors worried that a lift in interest rates could impact the price of yielding equities, keep watching for this to be led from a realignment in US and European interest rates.
In the March 2015 Monetary Policy Statement, the RBNZ moved to a neutral bias, concluding that interest rate movements could be “either up or down”. While this neutral bias did not last long, the change in tone was paved by recent speeches from key officials. In mid April, Deputy Governor, Grant Spencer, highlighted that the RBNZ did not feel it could do much more to cool the Auckland housing market, and that job really fell to the government to consider its own policies on resource management and tax. Last week, Assistant Governor, John McDermott, highlighted NZ inflation has been stubbornly low, justifing NZ monetary policy to remain stimulatory for longer.
The statement released with the latest OCR Review could not have been clearer, saying that:
- _“The Bank … is not currently considering any increase in interest rates.”
- _“It would be appropriate to lower the OCR if demand weakens, and wage and price-setting outcomes settle at levels lower than is consistent with the inflation target.”
This stood in stark contrast with the US Federal Reserve’s policy statement released a few hours earlier. In its communication, the US Fed looked through the recent weather-related moderation in US economic growth, and continued to conclude that it plans to raise interest rates when it has seen further movement towards its dual labour market and inflation targets.
Importantly, whereas in March the US Fed explicitly ruled out the chance of a move in April, this time around the US Fed was silent on the prospects of a move at its next meeting. While the chance of the US Fed lifting interest rates at its next meeting in June remains low, it does highlight that it is looking to keep the options open and that every meeting is “live”. The onus is squarely on the strength or weakness of economic data.
Global and NZ equity markets have experienced considerable strength in recent years, in part driven by a search for yield sparked by extraordinary central banks stimulus. For those investors worried that a lift in interest rates could upset equity markets, keep watching for this to be led from overseas, rather than our own central bank.
The reaction of equity markets to any removal of stimulus will also depend on the speed with which the US Fed eventually lifts interest rates and the type of data that prompts the move: for example, a sharp move driven by an inflation surprise would likely hurt equities; whereas past cycles have illustrated that a gradual move prompted by strong economic activity tends to be positive for growth-orientated equities.