MNI ANALYSIS: RBNZ Mandate Change Unlikely To Mean Easy Policy

By Sophia Rodrigues

     SYDNEY (MNI) - Downside risks to the Reserve Bank of New Zealand's monetary

policy may have increased due to uncertainties about the policies of the new

government but a possible change in the central bank's mandate isn't one of

them.

     The key risks come from the immigration and housing policies of the

recently elected coalition government led by Labor Prime Minister Jacinda Ardern

and New Zealand First Deputy Prime Minister Winston Peters. The main concern is

that a sharp slowing in net migration and further slowing in housing market

activity could have significant knock-on effects on growth.

     These policies could be offset, at least in part, from increased spending

by the government and from a weaker New Zealand dollar. But at this stage it

appears that the net risk is to the downside.

     But it's unlikely any downside risk would come from a change to the RBNZ's

framework or the way monetary policy decisions are made.

     The new government plans to add an employment goal to the current central

bank mandate which only targets inflation. The government also wants to create a

committee-based model for policy decisions, rather than the current framework

where the governor is a sole decision-maker.

     Any such changes are expected to happen when a new governor is appointed,

which is expected to be a few months away.

     However, adding an employment goal in a few months may not result in an

easier policy because New Zealand's unemployment rate is already low, and the

labor participation rate is close to an all-time high. In the second quarter,

the unemployment rate was 4.8% -- the lowest since the December 2008 quarter,

and the participation rate was 70.0% -- not too far from the record high of

70.6% in the first quarter this year.

     The RBNZ estimated in August that the output gap in New Zealand was zero.

While the RBNZ uses various indicators to measure the output gap, it has in the

past admitted that labor market indicators have been the best indicators.

     This suggests there isn't much spare capacity in the labor market, so the

RBNZ is likely to be reluctant to ease monetary policy to bring down the

unemployment rate any further.

     In addition, as net migration slows under the new government's policy,

labor supply would decline, putting downward pressure on the unemployment rate

without any RNBZ policy change. 

     Migration had been contributing to strong growth in the labor supply and

potential output in the last few years. "The expansion in overall capacity means

that higher levels of growth may not necessarily be accompanied by significant

increases in inflationary pressure," the RBNZ said in August.

     This could mean that the output gap would turn positive more quickly if net

migration eases, leaving little room for monetary policy easing to boost

employment.

     It is important to note that even though the RBNZ doesn't have an explicit

mandate for employment, it is indirectly included in its price stability

objective.

     The policy targets agreement says "The government's economic objective is

to promote a growing, open and competitive economy as the best means of

delivering permanently higher incomes and living standards for New Zealanders.

Price stability plays an important part in supporting this objective."

     Delivering permanently higher incomes and living standards for New

Zealanders means the RBNZ wouldn't target employment goal in isolation,

especially if any such step in the short term could hurt the longer-term

well-being objective of the public.

     COMMITTEE-BASED POLICY DECISION MODEL

     It is unlikely that the RBNZ's monetary policy decisions in recent years

would have been different if they were taken by a committee rather than the

governor alone.

     The RBNZ has used committees in its monetary policy decision-making process

for many years, but until 2013 their use was largely restricted to pre-decision

discussion and advice.

     In 2013, the RBNZ strengthened the role of committees in making a monetary

policy decision, and according to ex-Governor Graeme Wheeler "these changes mean

the Bank now relies less on the single decision maker model."

     The Governing Committee consists of the governor and the deputy and

assistant governors, and is responsible for reaching a decision on the

appropriate setting for monetary policy. But the governor retains statutory

responsibility for the final policy decision.

     There is also a Monetary Policy Committee (MPC) that acts as an advisory

panel to the Governing Committee on monetary policy issues. The MPC is made up

of several senior RBNZ staff, including the governors, and two external

advisors.

--MNI Sydney Bureau; tel: +61 2-9716-5467; email: sophia.rodrigues@marketnews.com

--MNI BEIJING Bureau; +1 202-371-2121; email: john.carter@mni-news.com

--MNI Beijing Bureau; +86 (10) 8532-5998; email: vince.morkri@marketnews.com

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