Free Trial

REPEAT:MNI ANALYSIS:RBNZ Mandate Shift Unlikely To Mean Easing

Repeats Story Initially Transmitted at 05:18 GMT Oct 31/01:18 EST Oct 31
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

To read the full story

Close

Why MNI

MNI is the leading provider

of intelligence and analysis on the Global Fixed Income, Foreign Exchange and Energy markets. We use an innovative combination of real-time analysis, deep fundamental research and journalism to provide unique and actionable insights for traders and investors. Our "All signal, no noise" approach drives an intelligence service that is succinct and timely, which is highly regarded by our time constrained client base.

Our Head Office is in London with offices in Chicago, Washington and Beijing, as well as an on the ground presence in other major financial centres across the world.
}); window.REBELMOUSE_ACTIVE_TASKS_QUEUE.push(function(){ window.dataLayer.push({ 'event' : 'logedout', 'loggedOut' : 'loggedOut' }); });