MNI INTERVIEW: Model Shows RBNZ May Need To Cut Rates More

By Lachlan Colquhoun

     SYDNEY(MNI) - Modelling by the Reserve Bank of New Zealand suggests the

Official Cash Rate might need to be reduced by another 5 to 15 basis points on

top of May's 25-basis-point cut in order to achieve inflation and employment

targets over the next two-to-three years, Assistant Governor Christian Hawkesby

told MNI.

     With the Cash Rate at a record-low 1.5%, the RBNZ describes its current

outlook at "evenly balanced", but GDP growth running at 1.8% suggests that both

inflation and employment could come under pressure in 2019, Hawkesby, also

General Manager of Economics, Financial Markets and Banking, said in a phone

interview.

     "The OCR around 40 basis points lower over the next 12 months, brought

inflation back to target in a reasonable time period, with employment remaining

near the maximum sustainable level," said Hawkesby, referring to the modelling.

     In contrast, a larger cut of 75 basis points would have both inflation and

employment overshooting targets, he said.

     Inflation is currently within the target range, at 1.5%, while unemployment

increased slightly in the final quarter of 2018 to reach 4.3%. Under the Bank's

dual mandate, adopted this year, it targets not only core inflation of between

1% and 3%, but also a labour market "operating near maximum sustainable

employment."

     Hawkesby said the impact of the May rate cut would take time to show up.

     "I don't think you can expect immediate evidence of how previous rate cuts

are playing out in the economy," he said, adding that, while the OCR is likely

to remain around current levels in the medium term, the RBNZ still has room to

move to cut further if the economy fails to respond.

     While the RBNZ's next OCR decision is due on June 26, the next decision

combined with a Monetary Policy Statement is Aug. 7.

     Hawkesby described the timing and magnitude of May's 25-basis-point cut as

"tactical", allowing the the RBNZ " to watch and wait and see how the economy

evolves."

     "By not sending a strong signal of what the next move is that really puts

the market in a position where they can focus less on us and what we are

expecting, and more on the data and what the data is actually saying," he said.

     "That then puts us in a good position because then there is some

information content in market pricing."

     In May, with the global economy slowing, and weak household spending and

business investment, the RBNZ calculated that if it left rates unchanged, it

would take a number of years for inflation to return to target, and that

employment would also fall.

     "In order to achieve our policy objectives, we agreed that additional

monetary stimulus was needed to help bring inflation back to the 2% mid-point

and support maximum sustainable employment," said Hawkesby.

     "We then turned to the questions of the magnitude of stimulus we wanted to

adopt and the timing and means by which we would deliver this."

--MNI London Bureau; +44 203 865 3829; email: jason.webb@marketnews.com

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