Crisis communications: New Zealand’s advice to the RBA on radical rate policy

The deputy governor of the Reserve Bank of New Zealand (RBNZ) says one of the toughest challenges facing Australasian central bankers is explaining why interest rates are approaching crisis levels seen in other major economies during periods of financial upheaval when there’s not actually a crisis.

The remarks come as speculation builds that policymakers in both countries may have to introduce unconventional policy measures to stimulate economic activity given the inability of prior rate cuts to boost inflationary pressures.

UBS Australasia Conference 2019 – Day 2 – 
Christian Hawkesby, Assistant Governor/GM Economics, Financial Markets and Banking, RBNZ. Tuesday 19th November 2019.
UBS Australasia Conference 2019 – Day 2 – 
Christian Hawkesby, Assistant Governor/GM Economics, Financial Markets and Banking, RBNZ. Tuesday 19th November 2019.Credit:Michele Mossop/UBS.

“One of the reasons we’ve been aggressive with our interest rate cuts this year has been a sense that by having looser monetary policy early, it reduces the probability that you’re going to have to do more later,” Christian Hawkesby, assistant governor of the RBNZ, said during a panel discussion on monetary policy at the UBS Australasia Conference in Sydney on Tuesday.

“That’s been a real communication challenge for us because in August when we cut by 50 basis points, that was part of that thinking.”


The decision to slash New Zealand’s cash rate by double the amount expected in August stunned financial markets, especially as moves of similar magnitude had only been seen during crisis periods in the past. The challenge, Mr Hawkesby said, was to convince those in markets and on Main Street that this time was different.

“It’s very hard to communicate to markets who are looking to extrapolate moves and it’s very hard to communicate it to the general public,” he said, acknowledging that it risk fuelling speculation about “what does the Reserve Bank know that we don’t know”.

“That was a really key part of our communication challenge was to tell that story about the economy already being in good shape and us just acting to keep it in a good shape being in a different environment than in the GFC and other times where people have seen 50 basis point cuts previously.”

With the cash rate already at record lows and likely to fall further according to consensus economist and market expectations, Mr Hawkesby said the next challenge facing the RBNZ and RBA is what type of unconventional policy measures will be most effective in helping to achieve their inflation mandates.

With longer-dated bond yields in both countries extremely low compared to historic norms, and with bond issuance “very moderate” due to “strong fiscal positions”, Mr Hawkesby said “all of those things are going to have come into how we think about designing unconventional policy if and when we need it”.

While he discussed the possibility of using negative interest rates as a possible response, Mr Hawkesby said the main challenge when considering unconventional measures is convincing people it will work.

“If you can’t do that then you’ve almost got the worst of both worlds,” he said. “You’re seen as a ‘basket case’ because you have negative interest rates but not having a story about how it’s going to be effective. We think that’s really key to the design.”

He admits that task will not be easy.

“The thing that struck me most in this part of the world is how dismissive markets are of unconventional monetary policy,” he said. “I’m not sure whether it’s because of impotence of around the effectiveness of unconventional monetary policy or a perception of not wanting to be put in with the basket cases of the other countries that are doing it.”

RBA governor will deliver a closely watched speech next week. At the RBA’s July policy meeting, it said “a package of measures tended to be more effective than measures implemented in isolation” and that it “was important for the central bank to communicate clearly and consistently about these measures”.

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