Rate cut aimed at staving off unconventional monetary policy

Steep rate cut aimed at staving off unconventional monetary policy: Hawkesby

By Rebecca Howard

Aug. 21 (BusinessDesk) - The recent steep rate cut by the Reserve Bank of New Zealand was aimed at reducing the probability that unconventional tools would be needed in the future, assistant governor Christian Hawkesby said in a speech published on the bank's website.

The central bank took markets by surprise earlier this month when it cut the official cash rate by 50 basis points to a record low 1 percent.

The RBNZ is mandated to keep annual inflation between 1 percent and 3 percent, with a focus on the mid-point, while ensuring maximum sustainable employment. Inflation was currently running at 1.7 percent and the labour market was operating near maximum sustainable employment, it said.

"More decisive action now gave inflation the best chance to lift earlier, reducing the probability that unconventional tools would be needed in the response to any future adverse shock," Hawkesby told the Bank for International Settlements forum at the Bangko Sentral ng Pilipinas, in Manila.

However, as a contingency, the bank is undertaking further preparatory work on unconventional monetary policy tools. He also said no future options had been ruled out, with foreign central banks already having used a variety of unconventional tools, including negative interest rates, forward guidance, foreign exchange intervention, and a range of government and non-government asset purchase programmes, widely described as 'quantitative easing'.

Hawkesby also noted the central bank has lowered its estimate of a neutral interest rate, which it now estimates to be centered on 3.25 percent, down from around 5 percent prior to the 2008 global financial crisis.

"All else equal, a lower neutral rate implies that we need to set our official cash rate lower to deliver the same amount of monetary stimulus to the economy," he said.

Hawkesby also said that while many commentators have questioned whether monetary policy still works in the current environment, recent evidence would indicate "monetary policy does still have bite even in this low interest rate world."

(BusinessDesk)

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