The central bank has previously signalled another rate cut was coming in April
Last week, the Reserve Bank of New Zealand Governor Adrian Orr (pictured) announced that he was leaving his role as leader of the central bank, effective immediately. His sudden departure stage left – with three years remaining in his current term – stirred up a number of unanswered questions. Most importantly, is the bank still planning on reducing rates at its April meeting?
After slashing the official cash rate (OCR) in February by 50 basis points, the nation's central bank said it anticipates further rate cuts in April and May – although smaller cuts, around 25 basis points each.
During his resignation speech, Orr, who has been in the governor's seat since 2018, said that there is "much work left to do on several major multi-year strategies that the RBNZ is following. Ongoing focus and funding will be critical to these projects' success."
But the central bank boss’s abrupt departure has left some to wonder whether the RBNZ will carry out its promises to continue reducing rates under a new governor.
Satish Ranchhod, senior economist at Westpac NZ, said the Orr's exit, for now, will likely not influence the bank.
"The Reserve Bank signalled pretty clearly about already looking at cuts at their next meetings in April and May and since those decisions are made by a committee, and Adrian was only one member of that committee; we don't think his [departure] really changes that outlook," Ranchhod told New Zealand Adviser. "That's of course depending on how economic conditions, generally, shake up.
"In the short term, we don't think his departure has a big implication for monetary policy," Ranchhod said. "The new-term policy outlook is probably not going to be steeped in too much by his departure. The economic conditions that are shaking up are probably broadly matching what the RBNZ had expected. But beyond that time, you know, things become a little more uncertain."
Kelvin Davidson, economist at CoreLogic NZ, agreed.
"We have a monetary policy committee who decides interest rates," Davidson said. "The chair of the committee, or the head person, that person's opinion probably counts the most. But still, it's a committee and I don't think Orr's departure will change whatever was going to happen anyway. Inflation figures are still telling us that things are under control, and the economic figures are still looking a bit weak."
Long-term implications
Long term, it is still unclear how a new governor will impact New Zealand's central bank.
The search for a new governor began immediately following Orr's resignation, with Deputy Governor Christian Hawkesby serving as interim governor until March 31. After April 1, a temporary governor will be put in place for up to six months, with Hawkesby acting as chair of the Monetary Policy Committee during the transition.
"Hawkesby has already been part of the Monetary Policy Committee," Davidson pointed out. "So the committee is not really new yet. The time to think about a possible change of direction would be when the actual new full-time governor comes in – which might be another six months or something like that. In the meantime, it's business as usual, because it's more or less the same committee."
Meanwhile, the cause of Orr's swift exit is still unknown, leaving market participants to simply speculate.
"I mean, that's a pressure job for sure; there's been a lot of criticism. He may well have just decided he's had enough," Davidson said. "But who knows? There might be other reasons."
But New Zealand is no stranger to volatility and rapid changes. The country has been dealing with conflicting forces and uncertain market dynamics for some time, causing many Kiwis to rein in their spending habits. Headwinds include rising unemployment rates, higher costs of living and falling property prices. At the same time, inflationary pressures appear to be subsiding, which, coupled with the reduced rates, caused a wave of optimism and renewed activity in some parts of the market.
Over the extended term, however, Ranchhod said there will likely be some effects on the economy and property markets.
"There are some areas that the Reserve Bank was looking at, which might be subject to a bit more [vetting] now," he said. "Those are things like, how much capital banks have to hold in New Zealand? Which is something that Mr. Orr had been looking at. We can also see the Reserve Bank taking a look at other matters around potential regulation, like loan-to-value ratios [LVR], or debt-to-income ratios [DTI], which are issues that were areas of attention during his time in office."
Davidson reiterated Ranchhod's thoughts in terms of the property markets, and that the new governor might look to revise LVR and DTI ratios. "But at the moment, it's so hard to speculate," he said. "We don't know what would have happened if Adrian had hung around. We'll just have to wait and see who the new governor is and try and figure out what their view on different things might be."
The RBNZ’s next meeting is scheduled for April 9.
