'Flip-flopping' Reserve Bank dents its credibility, mortgage broking boss says

"Flip-flopping" about the future track for interest rates does not do the Reserve Bank any favours, the head of the country's biggest mortgage broking firm says.

The Reserve Bank will provide an update on the official cash rate (OCR) on Wednesday.

A number of bank economists now predict it will cut the rate, despite its last forecasts showing it did not expect to reduce it until this time next year.

David Cunningham, head of mortgage broking firm Squirrel, said it was positive that the Reserve Bank had indicated in its last update that it was potentially changing its point of view from that of May, when it had discussed the possibility of another rate increase.

But he said the quick change was not helpful for the central bank's reputation.

"In the big scheme of things, it doesn't change the world, they get to the right place but there was maybe too much pain inflicted on New Zealanders in the meantime… people really struggling, consumers with higher interest rates than they needed to be, businesses that have gone broke."

He said a problem was the structure of the monetary policy committee.

"I don't believe consensus is a good approach."

He said a consensus approach to setting rates encouraged "group think", and a vote would be better.

"That's one of the main causes of inconsistencies in Reserve Bank messaging over the last few months."

He said the monetary policy committee should also change to have a majority of independent members.

"Right now, the vast majority of the Monetary Policy Committee is made up of RBNZ staff. And it's their colleagues on the RBNZ economics team who are responsible for producing the RBNZ's OCR and inflation forecasts, based on their read of economic indicators.

"That dynamic makes it tough for a large proportion of the MPC to call it out when they think the RBNZ's economists may have got it wrong, or are perhaps missing the nuances of what's happening on the ground-which is why independent MPC members play such a vital role."

HSBC chief economist Paul Bloxham said the challenge for the Reserve Bank was how different its forward guidance in May had been from market expectations, now and at that time.

"Adding to this challenge, some of the key economic data that the central bank forecasts - the CPI and unemployment rate - have turned out largely as the RBNZ had expected, but the RBNZ's own projections for the cash rate are still a very long way from market pricing.

"In short, if the May projections were a genuine reflection of the RBNZ's reaction function, it is hard to see them cutting this week and cutting significantly after that.

But he said the market believed a rate cut this week was more likely than not.

He said if the forward guidance provided in May was not a genuine reflection of the central bank's reaction function, a much closer examination of the usefulness of forward guidance should be considered.