MNI INSIGHT: RBNZ Unperturbed If Inflation Is Low For Longer

-RBNZ's View Echoed By RBA Calm Inflation Below Target Band

By Sophia Rodrigues

     LONDON (MNI) - The Reserve Bank of New Zealand doesn't have much of an

issue with inflation remaining below the mid-point of the target band and is

unlikely to adjust monetary policy even if inflation fails to rise in line with

its projections, MNI understands.

     There is one important caveat to this. The RBNZ will remain relaxed on the

inflation front as long as employment is around the maximum sustainable level

and the economy is growing at a decent pace.

     If the labor market weakens or economic growth starts faltering, then it

would test the RBNZ's patience and put an official cash rate cut back on the

table.

     --STATUS QUO ON POLICY ACCOMMODATION

     There's also another scenario where the RBNZ would consider lowering the

OCR. That would happen if funding costs for New Zealand banks rise further,

pushing them to raise mortgage rates.

     The RBNZ prefers a status quo where it is not keen on easing monetary

policy further but it also doesn't want to see interest rates in the economy

rise further.

     If that status quo is broken by a rise in interest rates such as mortgage

rates then the RBNZ is likely to offset it by lowering the OCR.

     The RBNZ's projections for the economy made in the May Monetary Policy

Statement show annual inflation making slow progress from 1.1% y/y in Q1 to 1.6%

by the end of 2018 and very slow progress after that to 2.0% by the end of 2020.

     Since Q3 of 2011, annual inflation has touched the mid-point of the target

band just once, in Q1 of 2017. So if inflation outcomes match the RBNZ's

projection and reach the mid-point 2.0% by the end of 2020, it would be the

first time in nearly four years or only the second time in over nine years.

     For an inflation-targeting central bank like the RBNZ that's a long period

of inflation missing the target mid-point but changes made in the Policy Targets

Agreement (PTA) when Governor Adrian Orr took over his role have given the RBNZ

greater flexibility.

     The new PTA removed the references to "average", both for keeping future

annual CPI inflation between 1% and 3% over the medium-term, and for the focus

on keeping future inflation near the 2% mid-point. The new PTA also included

maximum sustainable employment (MSE) as a goal of monetary policy which has

taken the focus away from the lone inflation target.

     In May, the RBNZ, based on available evidence, judged that employment is

around its maximum sustainable level. Given the MSE is difficult to define and

measure, the RBNZ used a broad range of indicators to make an assessment. They

included level of employment, employment rate, unemployment rate, participation

rate, underutilization rate, underemployment rate, potential labor force and an

estimate of NAIRU (the non-inflationary jobless rate).

     --RBA CALM TOO

     Interestingly, the RBNZ's view is echoed by the Reserve Bank of Australia

which also remains unperturbed that inflation has been below its target band.

     At a panel discussion at the ECB conference last week, RBA Governor Philip

Lowe said "the inflation rate has been below the mid-point of our target for

some years, and it's going to stay that way, I think."

     And like the RBNZ, Lowe suggested that he would be tolerant of low

inflation as long as the labor market is performing well: "...my view has been

that the welfare maximising approaching, which is really what we're about,

maximising the welfare of the people, is to be patient as long as the labor

market is improving."

--MNI London Bureau; tel: +44 203-586-2223; email: david.robinson@marketnews.com

[TOPICS: MMNRB$,M$A$$$,M$N$$$,MX$$$$]