Thursday 22nd March 2018
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Adrian Orr will have a new operating mandate when he starts as Reserve Bank governor next week and analysts say he may break the mould of a staid central banker, even if it isn't clear if he's a hawk or a dove.
Orr, who comes to the role after 10 years as head of the New Zealand Superannuation Fund, will have a new policy targets agreement (PTA) that is expected to change the central bank’s long-held exclusive focus on inflation targeting to include an employment objective.
Currently, the central bank is mandated with using monetary policy to keep inflation within a 1 percent to 3 percent target range, with a focus on the midpoint. The new government, however, has said it wants the central bank to target maximizing employment along with price stability. It is also pushing for other changes, including shifting to a committee structure as opposed to a sole-decision maker, and a wider review of the Reserve Bank Act is currently underway.
Acting central bank governor Grant Spencer kept the official cash rate at a record low 1.75 percent today and signaled no change on the immediate horizon as inflation remains very tepid.
“The key question for the market is not what happens today, but what is going to come out of the new PTA when Adrian starts,” said ASB senior economist Jane Turner.
The new PTA is expected to be made public at any time and while it could contain something unexpected, Turner said it is most likely to include a non-numerical employment objective “which will allow the RBNZ the most flexibility when they are responding to a dual-target of price stability and maximizing employment.”
As a result, “we don’t expect to see any dramatic shift in the monetary policy outlook with the incoming governor,” she said, noting he was deputy governor and head of financial stability at the central bank from 2003 to 2007, before shifting to the NZ Super Fund.
The central bank is forecasting that rates will remain on hold at a record low 1.75 percent at least until the latter half of next year, with a full quarter-point increase not signaled until March 2020.
Annette Beacher, chief Asia-Pac macro strategist for TD Securities, said, however, Orr “is somewhat of a wildcard for global investors, and NZ assets are far more significant for them now than when he was RBNZ deputy governor.”
Economists wouldn't be drawn on whether they are expecting him to be more hawkish or dovish as "no one really knows if Adrian is a hawk or a dove now, and I doubt he would want to be placed in a category," said Christian Hawkesby, executive director of Harbour Asset Management.
Bank of New Zealand head of research Stephen Toplis concurs. "I don't think you want to characterise Adrian as more or less hawkish than Graeme Wheeler. I would characterise Graeme as an interventionist who felt that he had to follow through on a stated course of action to the end, if at all possible," he said.
Toplis said the new governor is "likely to be pragmatic, take a holistic view of the role and place of monetary policy, have a healthy degree of cynicism about what central banks can and can’t do, and be responsive if and when the environment changes."
Another change is likely to be an improvement in the way the central bank communicates, says Harbour Asset's Hawkesby.
“In recent years, the RBNZ’s messages in publications or press releases often haven’t been backed with the same confidence in press conferences, creating the scope for mixed messages or appearance of a lack of conviction," he said. "I suspect that Adrian will present with much more confidence."
Hawkesby likened Orr to UK politician Boris Johnson. “The stereotype of a central bank governor is someone whose communication is cautious, reserved and dry. Adrian is more like Boris, with communication that appears more spontaneous and witty,” he said.
TD's Beacher warned, however, “there is the risk that his ‘good clear communicator’ reputation means he could make a poor choice of words on occasion when explaining the bank’s stance on policy settings.”
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