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Labour would change Reserve Bank - so what?

A change of government this weekend could mean a new direction for the Reserve Bank and another element for investors to understand.

Thursday, September 21st 2017, 6:00AM

by Susan Edmunds

Labour has indicated that if it is in power, it will change the Reserve Bank model so that official cash rate decisions are made by a committee, not just the governor.

It would also add employment to the bank’s mandate so that it would have to focus on both controlling inflation and achieving full employment.

“We’re doing this because in the wake of the global financial crisis there has been a significant challenge to the effective operation of monetary policy, in particular in dealing with a low or no inflation environment,” Labour’s finance spokesman Grant Robertson said.

What might that mean for investors?

Harbour head of fixed income Christian Hawkesby, said although that would be a change for New Zealand, it was still a reasonably mainstream view by international standards. “They’re not changes we think will scare the markets.”

He said the bank already took the labour market into account when it made its decisions.

Chris Tennent-Brown, an economist at ASB, said Labour’s proposal was not that different from what happened in Australia.

“It doesn’t change the interest rate outlook, just changes the way the Reserve Bank weighs things up.”

He said the economic conditions that would affect companies that were issuing bonds were unlikely to change much, either. The major tax changes that had been possible have been pushed back. Investment-grade bonds at 4% over five-years would probably still be a feature of the market, he said.

Growth ahead either way

Whichever party forms the next government, their policy promises are likely to mean economic stimulus.

Hawkesby said the Reserve Bank had indicated that it saw National’s proposed Working for Families changes as a potential growth impulse for the economy.

“Then if it was a Labour-led government the fiscal impulse is stronger yet again. Whether it’s a National- or a Labour-led government it still looks like over the next year the economy will be supported by strong fiscal stimulus.”

He said that could theoretically mean higher interest rates.

But if policies designed to limit the housing market, or immigration, had a faster effect than expected, that could have a blunting effect and keep rates low. 

“Both the Reserve Bank and Treasury are forecasting growth of 3% to 3.5% over the next couple of years from 2.5% at the moment. The growth is already baked in so if it doesn’t play out it keeps interest rates lower.”

He said Harbour expected the OCR to remain on hold for some time to come.

Tennent-Brown said there were broader economic themes that would play a bigger part than who was the next prime minister. He said the low-interest rate, low-inflation environment was likely to continue under any government.

Hawkesby said investors could be wise to invest for two or three-year terms if they could yield pick-up in that part of the curve.

Long-term rates could be expected to pick up as a result of international influence, he said. “The key message for investors is that elections come around every three years. They are one of those things that as investment managers we’re always factoring into the landscape. Rather than getting freaked out or distracted, focus on what matters - your longterm goals.”

Tags: ASB Harbour Asset Management interest rates investment OCR Reserve Bank

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