The Sport of Monetary Policy Statements

Forecasting Official Cash Rates is easy.

For all the commentary and opinion in the wake of last Thursday’s OCR review statement, there are just four people in New Zealand who I back to accurately predict the rate every time.

Former team-mates of mine, they have been nationally recognised for their OCR analysis in previous years, and devising monetary policy statements was once the sport of choice for this group.

Back in 2007, we were the Reserve Bank, comprising two governors, two economic analysts, and one IT expert.

The challenge
The inclusion of the words “for now” in new governor Graeme Wheeler’s latest review has many commentators suggesting a move in OCR may be imminent.

In an effort to cut through the clutter I have gone to my former team, confident they will provide a dead-set certain forecast for Mr Wheeler’s second OCR.

The question I propose to them:

• Based on current economic conditions, should the next OCR go up, down or stay the same?

The team
In our final year at Hasting's LIndisfarne College our economics teacher encouraged us to participate in the RBNZ’s Monetary Policy Challenge, from which we formed the college’s 2007 Monetary Policy Challenge squad.

This competition began in 2002 and is based on the simple premise of providing high school students the opportunity to work as a mock Reserve Bank.

We were required to analyse economic conditions and the outlook for inflation, before formulating a Monetary Policy Statement for the June 2007 announcement.

My team-mates, and what they do now, were:

• Andrew Harrison (24), BDO graduate auditor.
• Antony D’Esposito (22), Telecom graduate accountant.
• James Harty (22), final year of a double degree in law and accountancy at the University of Otago.
• Stuart McKelvie (22), investment banking analyst in Auckland.

The credentials

We surpassed all expectations to place third in New Zealand – a ranking I figure is justification to classify ourselves as “experts”.

Our suggestion in 2007 was to keep the OCR at 7.75% for the June announcement. Despite our sound advice, the rate rose by 25 basis points.

Andrew Harrison’s groundwork single-handedly saw us blitz the competition at the regional finals, and ensured our presentation at nationals was sound.

“Back then we disagreed with Dr Bollard when he chose to raise the OCR to 8% based on ‘bouyant’ housing market activity.”

He says decisions are as much about the movement as they are about the presentation and commentary which goes around that.

“Our estimations as students were based on a loose understanding of economic theory and a strong grasp of how to waffle – this, as I still understand it, is what monetary policy decisions involve.”

James Harty says he found the competition an exciting and enjoyable academic challenge.

“Our two trips to the RBNZ in Wellington gave us a valuable insight into the inner workings of the bank and the economy, as well as a couple of days off school.”

Antony D’Esposito is more realistic in the cavalier approach with which we tackled the task.

“At the start of the competition I had no idea what to expect, and I am pretty sure the five of us collectively did not take it seriously until we had our regional presentation.”

Team captain Stuart McKelvie considers the competition to be a “rite of passage” for any aspiring economist.

“The MPC provides an outstanding opportunity for high school students to showcase their economic literacy.”

The 'expert' predictions
Five years down the track there is still a consistency between our individual forecasts.

The team has McKelvie pigeonholed as a future Reserve Bank governor and so it is only prudent I consider him first.

“A rise in the near term appears unlikely – inflation is modest and unemployment is concerning.

“Moreover, the exchange rate remains elevated on the back of continued European uncertainty, and the relative positioning of New Zealand as a safe haven in the global economy.

“To lift the coupon on NZ debt would only fuel demand for the NZ dollar, and stifle the recovery of the all-important export sector.”  

Harrison, our vice-captain, backs McKelvie’s OCR assessment.

“The path laid out so far is one aimed at recovery and for this reason I can’t see a rush to change the OCR any time soon as the RBNZ, and especially the new governor, need to get businesses to buy into their commitment to recovery.”

Harty also says he would maintain the rate at 2.5% until at least the middle of next year.

“I am aware of the current issues facing our economy, such as the $20 billion Christchurch rebuild and the tightening fiscal policies currently in place, and believe holding the OCR at 2.5% for the medium term coincides with these issues.”

D’Esposito is less forthcoming in his outlook, but is sure the OCR will remain constant for at least a year.

“In my humble and modest opinion, spending, by both households and businesses, is the most important factor in the make up of an economy.

“At the moment there should be no desire for the RBNZ to drop the OCR as inflation, unemployment and economic growth, despite not reaching their primary targets, are still relatively favourable.“

The December 6 MPS
The forecast is clear – Lindisfarne College’s 2007 MPC team has again suggested the OCR should be held, albeit this time at 2.5%.

Of course, in 2007 the RBNZ ignored our calls, so this forecast may have a few holes in it.

McKelvie says looking at monetary policy decisions in purely economic terms is too simplistic.

“There will always be valid arguments to lift, hold, or drop the OCR – the difficult part is assessing the weight of these arguments.”

He does not envy new RBNZ governor Graeme Wheeler’s task.

“With no track record in central banking, Mr Wheeler is somewhat of an unknown – expectations will be set, and his credibility tested, and when it comes to central banking credibility is key.

“If Mr Wheeler is seen to back down in the face of a weakening September quarter, the Reserve Bank’s ability to curb inflationary expectations in the future will be jeopardised – an unlikely gamble for the newcomer.”

Hamish McNicol has a Bachelor of Arts from Victoria University, a post-graduate diploma in journalism from Massey University and an interest in business journalism. He has been interning at NBR Print and ONLINE.