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

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