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REPEAT: MNI: New RBNZ Agreement Gives Performance Flexibility

MNI (London)
Repeats Story Initially Transmitted at 08:43 GMT Mar 26/04:43 EST Mar 26
By Sophia Rodrigues
     SYDNEY (MNI) - The Reserve Bank of New Zealand will have greater
flexibility for inflation targeting in the new Policy Targets Agreement (PTA) as
the removal of the word "average" for the inflation target will make performance
measurement less rigid, allowing them to focus on stable prices and other
related goals of monetary policy.
     Earlier Monday, incoming RBNZ Governor Adrian Orr and Finance Minister
Grant Robertson signed a new PTA which, for the first time, has employment
outcome as an additional consideration in the conduct of monetary policy. Such a
change was already well-flagged, so didn't come as a surprise.
     There were other changes too, resulting in a more concise PTA but with
greater clarity. The most significant change was the dropping of the word
"average", and the inclusion of the word "flexible" in the inflation targeting
regime.
     "The agreement continues the requirement for the Reserve Bank to keep
future annual CPI (consumer price index) inflation between 1 and 3 percent over
the medium-term, with a focus on keeping future inflation near the 2 percent
mid-point. The new PTA now also requires monetary policy to be conducted so that
it contributes to supporting maximum levels of sustainable employment within the
economy," a joint statement by the RBNZ and the Minister of Finance said Monday.
     The statement removed reference 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 RBNZ will also implement a flexible inflation targeting regime that
will have regard to the efficiency and soundness of the financial system, seek
to avoid unnecessary instability in output, employment, interest rates, and the
exchange rate, and respond to events whose impact on inflation is expected to be
temporary in a manner consistent with meeting the medium-term target.
     --PATH IMPORTANT, NOT AVERAGE
     Deleting "average" from inflation targeting essentially removes the
rigidity because the RBNZ needs to just ensure inflation in future remains
within the target band, with a focus on near-2%. This means the RBNZ will have
less explaining to do when inflation is above or below the band, as long as it
shows the path towards 2%. 
     In the current monetary policy cycle where annual CPI inflation has been
below the 2% mark for 24 of the last 25 quarters, this assumes greater
significance. Just because CPI has been below the 2% mark for so long, it
doesn't mean the RBNZ will have to keep inflation above 2% to have a average of
around 2%. The future target band and the focus on 2% is all that is important.
     This flexibility is important because of the inclusion of full employment
in the mandate, as it could mean slightly less focus on the previous mandate of
just inflation-targeting.
     In the current cycle, it could potentially allow the RBNZ to raise the
official cash rate sooner than previously expected, if for example, a higher OCR
is needed for other reasons, including the exchange rate or if global
developments become a compelling reason to change monetary policy.
     It might also mean the RBNZ could keep the OCR on hold for longer because
its performance wont be measured by "average" inflation.
     Similarly, in future, in a different cycle, the RBNZ would get more
flexibility to keep the OCR lower to maximise employment, even when inflation is
above the target band.
     --ASSET PRICES
     Another change in the PTA was the removal of monitoring of prices,
including asset prices in pursuing price stability. Instead, it just says the
RBNZ "is required to conduct monetary policy with the goal of maintaining a
stable general level of prices."
     Asset prices were specifically included in the PTA in 2012 when Graeme
Wheeler took over as governor. So removing that takes it back to the RBNZ Act
which says "The primary function of the Bank is to formulate and implement
monetary policy directed to the economic objective of achieving and maintaining
stability in the general level of prices."
     It is unclear why "asset prices" was removed from the PTA but the likely
reason was perhaps that there was never any clarity on how it should influence
monetary policy.
--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com
MNI London Bureau | +44 203-865-3812 | les.commons@marketnews.com
MNI London Bureau | +44 203-865-3812 | les.commons@marketnews.com

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