These models always need to be viewed with that in mind. If ANZ’s forecasts for headline inflation and the unemployment rate are plugged in, then the models imply the first OCR hike around the middle to latter part of 2019, which is actually similar to ANZ’s current forecast (November 2019).
But what it also implies then is in order for rate cuts to be contemplated more seriously again, something is going to have to change to alter that medium-term picture - and most likely that will be a further deterioration in the domestic growth outlook.
In other words, the weak signal currently provided by business sentiment surveys will actually need to start to permeate the broader economy.
The RBNZ looked at a few different versions of the Taylor Rule specification in a New Zealand context here.
ANZ’s own version of the Taylor Rule is relatively simple in its specification. It estimates the RBNZ’s policy stance (proxied by the level of the OCR) through deviations in inflation from its target midpoint (either using headline CPI inflation or the sectoral factor model), the unemployment gap (the difference between the unemployment rate and our various estimates of the NAIRU) and the spread between the floating mortgage rate and the 90- day bank bill rate.
In many ways, the last is a useful proxy for a time-varying estimate of the neutral interest rate.
ANZ hasn’t haven’t made any changes to its Taylor Rule model to account for the recent shift to the RBNZ’s soft dual mandate, largely because the changes are so fresh and because both inflation and employment are included in our specification in some shape or form already.
However, it would be interesting at some point in the future - perhaps through rolling-regression analysis - to see whether this new mandate does see a shift in the RBNZ’s reaction function relative to how it has behaved in the past.
Phil Borkin is a Senior Macro Strategist at ANZ NZ