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-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
     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).
     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: " 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:
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MNI London Bureau | +44 203-586-2223 |