How central banks communicate their monetary policy intentions to the market matters.

First, central banks must be credible. That is, they should do what they say they will do. Second, they should be transparent. That is, informed market participants should not be taken by surprise by central banks’ decisions.

Why this insistence on ‘no surprises’? Because surprises can create policy uncertainty and make planning by business leaders harder. Uncertainty can hurt the economy.

It’s easy to know when Official Cash Rate announcements are a surprise to the market. When they are, they immediately lead to shifts in interest and exchange rates. Anticipated announcements, meanwhile, lead to little or no changes.

So was yesterday’s OCR cut expected by the market? Most definitely it was not.

Bloomberg, for example, reported: “New Zealand’s central bank unexpectedly cut interest rates to a fresh record low and signalled further easing may be needed.” As a result, “the kiwi plunged by more than one U.S. cent.”

This was a big surprise which no one could have seen coming. Even Oliver Hartwich, the usually well-informed Executive Director of The New Zealand Initiative, got it wrong. 

Speaking on The Paul Henry Show, Oliver had predicted that there would be no change.

He was not alone with his view: 15 out of 17 leading economists surveyed by Bloomberg also believed that there would be no change. As did 17 out of 21 economists asked by Reuters.

When asked by Paul Henry how confident he was in his prediction, Oliver quipped “When have economists ever been wrong?” Whether it was his German sense of humour or that he was only hedging his bets, Oliver had a point. That is because his prediction was the rational one to make, based on the available information.

I have no views on whether cutting rates yesterday was a good idea or not. But I do have a view that the RBNZ should try to communicate its intentions better to the market.

After all, our central bankers should enable businesses to plan better. They should not make their lives harder.

Professor Robert MacCulloch is the Matthew S Abel Chair in Macroeconomics at The University of Auckland.