REPEAT: RBNZ Shld Study Immigration Impact on NonTradable Infl

Repeats Story Initially Transmitted at 23:42 GMT Jul 27/19:42 EST Jul 27

--Expert Says RBNZ Has Done Well To Retain Room For More Expansionary Policy

--RBNZ Also Need to Study What New Normal for MonPol Means for Future MonPol

By Sophia Rodrigues

     SYDNEY (MNI) - The Reserve Bank of New Zealand needs to do more work on

what recent high immigration levels mean for non-tradable inflation and what the

"new normal" for monetary policy means for future monetary policy, an external

expert called to review the forecasting and monetary policy decision-making

processes at the bank said.

     In a report published Friday, Philip Turner, a former Deputy Head of the

Monetary and Economic Department and a member of Senior Management of the Bank

for International Settlements, said his "main conclusion is that the monetary

policy process at the Reserve Bank of New Zealand works well."

     He identified two topics as priorities for further work.

     "The first is what the changing labor market under heavy immigration means

for non-tradable inflation," Turner said.

     "The second is what the "new normal" for monetary policy after years of

very low interest rates means for future monetary policy," he said. This is

because the impact of interest rate increases on the financial industry and on

the real economy may be quite different than in the past.

     He said that some "flavour" of this came up at the governor's parliamentary

testimony, where one member asked whether it was going to be more difficult to

make the call to increase interest rates given high levels of debt.

     "Higher levels of debt, increased stocks of financial assets and a bigger,

more diversified financial system are likely to change how monetary policy

works," he said.

     Turner said one very welcome feature of the papers and the discussions he

had was the clear distinction between tradable and non-tradable inflation which

is "still often ignored by some major central banks."

     But there was one important question raised during the discussions that did

not get a satisfactory answer.

     "Why was non-tradable inflation forecast to rise while labor costs were

not," he said.

     Turner said additional analysis of the labor market, and especially the

implications of immigration, seems warranted and there was already some progress

in that direction.

     "I saw several insightful RBNZ notes analyzing this topic, and it was

mentioned in the forecast meeting that there is now greater focus on labor

market processes in preparing the projections. This is welcome," he said.

     The RBNZ's policy of publishing the future path of the official cash rate

as a signaling device could create a challenge in some circumstances, Turner

cautioned.

     As an example, he said that if near-term growth is stronger than projected

but global uncertainties deepen then what is needed in the different sub-periods

of the next two to three years might differ.

     Overall, Turner said the RBNZ has done well in retaining room to pursue a

more expansionary monetary policy than many central banks.

     "The RBNZ has helped steer its economy through several large external

shocks."

     "Because it has done so without becoming trapped at a zero policy rate and

without multiplying the size of its balance sheet by buying domestic assets, it

has retained more room to pursue, if needed, a more expansionary monetary policy

than is available at present to many central banks of other advanced economies,"

he said.

--MNI Sydney Bureau; tel: +61 2-9716-5467; email: sophia.rodrigues@marketnews.com