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This week's RBNZ rate decision is starting point for new committee, says governor

Friday 29th March 2019

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Reserve Bank of New Zealand governor Adrian Orr said this week's shift to a more dovish stance wasn't his "last swing at the bat" as the sole decision maker but rather is the starting point of the new committee that will take over the reins on April 1. 

In Wednesday's monetary policy decision, the central bank took markets by surprise when Orr said that the next move was likely to be a rate cut, a switch from its previous more neutral message. 

Markets reacted harshly, with the kiwi dollar tumbling more than 1 US cent in the minutes following the announcement. It remains under pressure.  

Orr said today that he was pleased as "markets have shown that they understand what we are focused on and they are forward looking."

He said "what we really need is total understanding and confidence from financial markets about our goal, our determination to achieve that goal and the environment and information set we are operating within." 

Against the backdrop, markets have to "think very hard and have their own independent mind around what we are trying to achieve. They expressed that, I assume the other day, when the currency went lower," he said.

Regarding the shift to a committee structure, Orr reiterated that the aim is to create greater transparency and therefore legitimacy. 

On Thursday, Finance Minister Grant Robertson announced the members of the new committee, which includes three external and four internal members. 

Its first scheduled monetary policy decision will be the official cash rate decision and monetary policy statement on May 8.

"We will be working together to harness a diverse range of opinions and to have very, very robust discussions around what the right thing to do is and then we will be making decisions," he said. 

This week's rate decision and comment is the starting point for that committee, he said. "It's still the same country, it is still the same targets, it is still the same information set, nothing has changed."

Orr also touched on key issues the committee and central banks as a whole are grappling with, including the effect of low nominal interest rates on wider financial stability, how monetary-fiscal coordination can be better managed and - in a low interest rate environment - what role will fiscal policy play in the event of a downturn, he said.

He also said a key issue is recognising that the “impact of bank failures would be broader and harsher, the larger and more intertwined the failed banks are with New Zealand’s economy” and what regulatory and prudential settings would mitigate the risk of failure?

He emphasised several times that the bank is "open-minded" about its proposal to double the minimum amount of tier 1 capital that the four major banks have to hold from 8.5 percent to 16 percent of risk-weighted assets and to lift total minimum capital from 10.5 percent to 18 percent.


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