First impressions on the RBNZ's new PTA - Westpac

Westpac analysts are out with a note delving further into details about the Reserve Bank of New Zealand's (RBNZ) updated Policy Target Mandate, and what it could mean looking forward.

Key highlights

As Westpac noted, "The RBNZ will continue to target 1% to 3% inflation, with a focus on keeping future inflation near the two percent midpoint. Retaining the two percent midpoint was not guaranteed, and was important. Removal might have signaled higher average inflation in the future.

Employment is mentioned three times in the new PTA. The conduct of monetary policy must contribute to supporting maximum sustainable employment; monetary policy must avoid unnecessary instability in employment; and the RBNZ must explain how it is contributing to supporting maximum sustainable employment. The way this is worded allows for the RBNZ to symmetrically target some natural level of employment – that is, it allows for the RBNZ to raise interest rates because the employment market is overheating, as well as to lower interest rates when the labour market is slack. The wording also allows for the fact that the best long-term contribution monetary policy can make to employment levels is to maintain low and stable inflation. It is not obvious to us that the RBNZ will implement OCR settings much differently under this wording, although its communication and analytical methods might pivot towards the labour market."

Westpac went further to note that "The new PTA is more straightforward and explicit than old iterations. For example, the RBNZ is now explicitly directed to implement a flexible inflation targeting regime. This bodes well for the clarity of communication out of the RBNZ," although analysts specifically pointed out the path forward, stating that "there (sic) is not the final word. Today’s PTA was only a “bridge in the direction” of giving the RBNZ a dual mandate of both employment and inflation. There is still a possibility of further change when the new RBNZ Act is brought in, although there was no hint that any further change would alter the flavour of what has been released today."