New Zealand launches central bank review with eye on lifting employment

WELLINGTON (Reuters) - New Zealand launched a review of its central bank’s mandate on Tuesday, making good on an election promise to include maximizing employment as a monetary policy goal and providing investors with some relief by excluding currency targets from its overhaul.

A security guard stands in the main entrance to the Reserve Bank of New Zealand located in central Wellington, New Zealand, July 3, 2017. REUTERS/David Gray

New Zealand Finance Minister Grant Robertson said there was no plan to include the New Zealand dollar, the world’s 11-most traded currency, in the bank’s revised mandate - remarks that pushed the Kiwi up around a quarter of a U.S. cent.

The announcement suggested that the new Labour-led government will not make radical changes to the central bank’s mandate, a prospect that had caused some market angst in recent weeks.

It also signaled that Labour’s expansionary fiscal policy would not automatically result in tighter monetary policy in coming years.

Robertson said he did not expect the proposed alterations to have any immediate impact on monetary policy, but acknowledged that in a situation of high unemployment and slightly higher inflation, rates could be lowered.

“My view is that this shouldn’t have a dramatic impact, certainly in the near-term,” he told reporters in Wellington.

The Kiwi NZD=D4 has fallen more than 5 percent since September's election, due in part to uncertainty about the new government's plans for the Reserve Bank of New Zealand (RBNZ). It popped up to as high as $0.6957 on Tuesday on confirmation the currency would not be a part of the review. It was last trading at $0.6939.

Central bank reform was a centerpiece of the Labour Party’s election campaign, which saw leader Jacinda Ardern form a government with assistance from the nationalist New Zealand First party.

Ardern told Reuters on Tuesday that she had no concerns about the currency’s recent decline.

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A wider central bank mandate that also factors in employment could open the door for the center-left coalition government to boost spending on social services without heightening the need for the central bank to tighten policy, analysts say.

“The RBNZ will not be so quick to move higher in response to expansionary fiscal policy,” said Christina Leung, economist at the New Zealand Institute for Economic Research.

Labour plans to pour funding into healthcare, education and a homebuilding program, which would generate inflation.

Under the RBNZ’s current regime, that would lead to more hawkish monetary policy, but taking employment into account would raise the bar for any rate hikes.

The addition of employment would also bring the RBNZ into line with the U.S. Federal Reserve’s and the Reserve Bank of Australia’s policy mandates.

Robertson said that a bill would be introduced to parliament as early as possible next year.

Other proposed changes under the review include instituting a committee-based decision-making model to replace the current system in which the governor is the single decision-maker. The central bank could also publish minutes from its policy meetings.

The shake-up comes as the bank searches for a new permanent governor.

Robertson on Tuesday re-signed the existing policy framework, which embodies the bank’s current mandate, with acting RBNZ Governor Grant Spencer. That agreement will expire when Spencer’s term ends in March.

Reporting by Charlotte Greenfield in WELLINGTON and Wayne Cole in SYDNEY; Editing by Catherine Evans and Sam Holmes