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UPDATE 2-RBNZ holds rates in last meeting with pure inflation target mandate

Published 22/03/2018, 08:36 am
© Reuters.  UPDATE 2-RBNZ holds rates in last meeting with pure inflation target mandate
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* RBNZ holds rates at 1.75 pct, flags temporary dip in inflation

* National pension fund chief Orr takes over as governor next week

* Orr to be given additional employment goal (Adds detail, analyst comment)

By Marius Zaharia and Jane Wardell

WELLINGTON, March 22 (Reuters) - The Reserve Bank of New Zealand (RBNZ) flagged on Thursday a temporary dip in price growth as it held interest rates at record lows, its last decision before an expected deviation from its trademark pure inflation target mandate.

National pension fund chief Adrian Orr takes over as governor on March 27 from acting chief Grant Spencer, with markets expecting policy continuity from an experienced hand who is returning to central banking.

Orr is expected to be given an employment goal in addition to the 1-3 percent inflation target in a departure from the inflation targeting orthodoxy New Zealand pioneered roughly three decades ago, before most of the world adopted it.

The new Labour-led government, which made tweaking the central bank's mandate a key campaign policy in September's election, is expected to sign a new policy target agreement (PTA) with RBNZ before Orr, who has previously served as deputy governor and chief economist, officially takes over.

The addition of employment would bring RBNZ in line with the U.S. Federal Reserve and the Reserve Bank of Australia.

"There will be a new governor interpreting economic risks and there will be interest in whether that is materially different to what we have seen over (previous) governors," said Nick Tuffley, chief economist at ASB in Auckland.

"Combined with the change in mandate, people will be very interested to see whether that changes policy within the RBNZ."

At the margin, most analysts and the government expect the employment goal to add a dovish bias to monetary policy, but given the subdued inflation outlook the central bank is expected to leave rates at 1.75 percent for the rest of the year anyway.

Cementing those expectations, the central bank said monetary policy "will remain accommodative for a considerable period" as inflation was expected to "weaken further" in the near term mainly due to soft food and energy prices.

The RBNZ said inflation would still trend upwards towards the 2 percent target midpoint over the medium term and that longer-term inflation expectations were well anchored at 2 percent.

"You wouldn't expect a change given you're going to have a transition in governors so you want a bit of stability in message before that," said Ben Jarman, senior economist at JPMorgan (NYSE:JPM) in Sydney.

"The statement is pretty much unchanged, although there is some slight dovishness around their comment on inflation."

NO NZD MENTION

The New Zealand dollar NZD=D4 fell to its lowest since early February at $0.7154 before rebounding, with analysts citing the dovish message sent by the central bank flagging a temporary dip in inflation.

The RBNZ did not make any reference to the currency in its March statement, having said last month that it assumed the trade weighted New Zealand dollar "will ease over the projection period."

"The RBNZ has been uncomfortable with the degree of market attention paid to its exchange rate comments, and was probably pleased to have an opportunity to further reduce the focus on the exchange rate," Westpac analysts said in a note.

Inflation ran at a rate of 1.6 percent last year, below analyst expectations. Growth also disappointed, coming out at a weaker-than-expected 2.9 percent for 2017, data on Thursday showed. 15 analysts polled by Reuters expected rates to remain steady for the rest of the year and some see a potential hike in the first half of 2019.

New Zealand's subdued rate outlook is in tune with many other Asian economies, but contrasts with that of major central banks in the West, which are flagging rate hikes, or, in Europe's case, a looming exit from heavy stimulus mode.

Hours earlier, the Fed raised interest rates to 1.50-1.75 percent and forecast two more hikes in 2018. New Zealand GDP, rates, jobs, inflation

http://reut.rs/2pfJlMe

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