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RBNZ: how will new Governor interpret the intended "dual mandate" - Westpac

Analysts at Westpac noted that Adrian Orr was appointed Governor of the Reserve Bank of New Zealand, and will begin his five-year term on March 27. 

Key Quotes:

"We would describe this as a balanced choice. 

Adrian is currently Chief Executive Officer of the New Zealand Superannuation Fund. He has done two previous stints at the Reserve Bank - from 1997 to 2000 he was Head of the Economics Department, and from 2003 to 2007 he was Deputy Governor and Head of Financial Stability. Between those stints he was Chief Economist at Westpac, where a key part of his role was to monitor and forecast the Reserve Bank's actions. 

While this is not an internal appointment, Adrian is closer to being a Reserve Bank insider than other recent Governors. Neither of the past two Governors had ever worked for the Reserve Bank before they were appointed, and Don Brash worked there only briefly as a graduate. 

Adrian will start with an excellent understanding of the Reserve Bank and both of its key policy functions, monetary policy and financial sector regulation. He is well known as a strong communictor and is no stranger to the media, which bodes well for the clarity of communications with financial markets. 

The key area of interest to us is how the new Governor will interpret the intended "dual mandate" - the Government's intention to have the Reserve Bank target both employment and inflation. The law won't be changed before Mr Orr starts, but the Policy Targets Agreement signed by the incoming Governor and the Minister of Finance will reflect the spirit of the impending law change, so the RBNZ's reform will presumably start immediately.

We have been wary of the dual mandate, because it might make it harder for the Reserve Bank to raise interest rates when inflation is too high (since doing so could conflict with a directive to maximise employment). With Adrian Orr as Governor, we would expect the Reserve Bank to remain realistic about what monetary policy can achieve in the long run, while at the same time paying more attention to employment over economic cycles. 

The New Zealand dollar rose half a cent on the news of the appointment, and interest rates rose slightly."

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