The NZ swap curve showed little movement yesterday, after being pulled by opposing forces, higher US rates and lower Australian rates.
The 2-year rate was flat at 2.17% while the 10-year rate was up 1 bp to 3.21%.
NZ inflation-linked bonds remain the stand-out performer since the new government was formed, as the market prices in a higher longer-term inflation environment. Implied break-even inflation expectations for the 2030 bond have risen by 26 bps to 1.48% over the last week and a bit.
There was a good article on Bloomberg published this morning titled “Even in its birthplace strict inflation target loses luster”, referring to NZ’s imminent reform of the RBNZ Act. Moving away from strict inflation targeting is becoming more widely accepted as the best course of action.
This view was supported by an article published overnight by the Center for Economic Policy Research. The authors argue that in general, keeping maximum discretion should be a good rule of the thumb for any central bank to follow in the current day and age. The optimal inflation target may differ across countries and could evolve over time depending on a number of factors, including the scale of the damage inflicted by the crisis on the employment and wages. Central banks should establish a process of reviewing their goals, say, every five or ten years.
It seems then, that academic research supports an evolution in the way the RBNZ runs monetary policy and makes us wonder why the market seems concerned about reform of the RBNZ Act?
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Jason Wong is on the BNZ Research team. All its research is available here.
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