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Orr's style, employment mandate add interest to next week's 'on-hold' statement from RBNZ

Friday 4th May 2018

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The Reserve Bank is widely expected to keep rates on hold at 1.75 percent next Thursday but a few elements will shake things up, including the performance of the new governor and a new mandate to focus on employment. 


While all 15 economists in a Bloomberg survey expect the official cash rate to be kept at a record low in next week's monetary policy statement, they will be reading the MPS for any changes at the margin and scrutinising new Governor Adrian Orr's views and plans, in particular after a recent raft of media interviews where he called for richer dialogue. 


"This is the first OCR decision since Orr started along with the new Policy Targets Agreement (PTA) that includes the employment objective. And that will make this statement the most keenly read one since the RBNZ signalled the end of its last easing cycle," said ASB Bank chief economist Nick Tuffley.


In March, Finance Minister Grant Robertson and Orr signed a new PTA that adds the goal of "supporting maximum levels of sustainable employment within the economy" to the existing goal of price stability. 


However, while it is always possible Governor Orr will steer the RBNZ slightly differently to his predecessors "we don’t expect him substantially influence the RBNZ’s current take on the appropriate direction for monetary policy," Tuffley said. He still expects the first rate increases to come in the second half of next year and notes the bank could opt to hold off for even longer given higher wholesale interest rates, weak business and consumer confidence and still tepid inflation.


The central bank's most recent forecast from February showed the OCR rising to 1.9 percent in June 2019, unchanged from its prior projection in November. A full rate increase is still signalled by March 2020 when the benchmark rate is forecast to be 2 percent.  Markets are expecting the first hike in June. 


The trade-weighted index is now about 2.5 percent below the level the Reserve Bank had projected as an average for the second quarter of 75 in its February monetary policy statement, suggesting the tradables sector may become less of a force in keeping inflation low. Tuffley said that could see the RBNZ make a modest 0.2 percentage increase in its projections for annual inflation over the next 12 months.


Regardless of whether Orr rejigs those forecasts, Tuffley said "one thing we can be quite confident in is that Adrian Orr will spend a lot more time engaging with the public. In the first five weeks of his term, it already feels like he has given more media interviews than the previous permanent governor gave over his whole five-year term." According to Tuffley, a much higher level of transparency will leave financial markets and the broader public more aware of what the RBNZ is thinking and why.


Others agreed.


"Recent interviews have indicated that the new governor intends to provide more open communication, so the press conference should provide interesting colour on the RBNZ’s assessment and perception of risks going forward," said ANZ Bank New Zealand senior economist Liz Kendall. 


"It goes without saying that Adrian Orr’s presentation style in the post MPS news conference will be more dynamic than his predecessor," said Bank of New Zealand head of research Stephen Toplis. However, he isn't expecting any dramatic change in direction.


"Orr is open, articulate and sometimes very humorous but he’s still, at his core, a relatively mainstream economist who has already committed himself to price stability with a focus on the mid-point of the RBNZ’s target band," he said. 


The meeting also marks the first time the central bank must officially contribute to supporting maximum sustainable employment within the economy, avoid unnecessary volatility in employment, and explain how it is contributing to maximum sustainable employment. 


"At the current juncture, we suspect that the additional focus on the labour market will neither increase nor decrease the RBNZ’s caution about keeping the OCR low," said Westpac Banking Corp chief economist Dominick Stephens. 


The unemployment rate has dropped to 4.4 percent. According to Stephens, a  “hawkish” interpretation that the labour market is already beyond maximum sustainable employment might emphasise that the employment to GDP ratio is extremely high, and that firms’ reported difficulty finding labour is at a cyclical extreme. A “dovish” interpretation that employment has room to grow before reaching its maximum sustainable level would point to wage growth. 


"We suspect the RBNZ will conclude that the labour market is currently around neutral or a little tight," he said.


According to BNZ's Toplis, "by almost any measure available one can conclude that the economy is already very close to its maximum level of sustainable employment" and "at the very least one would have to conclude that the RBNZ could not contemplate cutting interest rates while the labour market is so tight."



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