RBNZ: Change in governance - Rabobank

The RBNZ is under the guidance of a new Governor from today and markets had responded well to the news of the appointment of Adrian Orr since he had previously held roles as head of economics and deputy governor at the central bank, notes Jane Foley, Senior FX Strategist at Rabobank. 

Key Quotes

“While Orr may be familiar, however, his leadership comes at a time of change for the RBNZ starting with yesterday’s announcement of an alteration in the central bank’s mandate.”

“From today the RBNZ will no longer be mandated to target just CPI inflation. While the requirement to target CPI inflation at between 1 and 3% over the medium-term will remain, the central bank will also be required to conduct policy such that it contributes to supporting maximum levels of sustainable employment within the economy.  The market has showed little reaction to the news since reform of the central bank’s mandate had been well tabled by the government.  A dual mandate of this kind has also been tried and tested by the Federal Reserve since 1977, although the Fed only adopted a specific target for inflation in 2012.”

“The introduction of a dual mandate is not the only change afoot at the RBNZ. A bill will be introduced to parliament in the coming months to implement’s the government decision to introduce a committee for monetary policy decision.”

“For now the expectation of steady policy will limit the impact of the RBNZ policy on the NZD. Clearly the evolution of inflation and the new MPC could cause the outlook to change later in the year. However, in view of the potential risks associated with the threat of trade war we expect the RBNZ to err of the side of caution in the foreseeable future.  We expect NZD/USD to hold around the 0.72 level on a 3 month view.  Given our expectation that rate differentials will favour the USD this year vs. a broad range of currencies, we expect NZD/USD to edge lower towards the 0.68 area on a 9 to 12 mth view.”