New Zealand central bank governor says markets understand its focus

(Adds details and more comments from Governor Orr)

WELLINGTON, March 29 (Reuters) - Market reaction to New Zealand central bank's unexpected shift to an easing bias this week showed that they understood what policymakers were focused on, Governor Adrian Orr said on Friday.

At a policy review on Wednesday, the Reserve Bank of New Zealand kept rates unchanged but surprised markets by flagging the next move in rates was likely to be a cut. The currency fell sharply and bond and bill futures rallied as a rate cut was priced in.

"What I was pleased with from the outcome of that discussion (around the review) is that markets have shown they understand what we are focused on," Orr said in a response to a question after he delivered a speech in Wellington.

"If financial markets watch us and we watch them then we are just looking at a mirror, we are not learning anything. So markets have to be forward looking and work very hard to learn what we are trying to achieve," Orr said.

Governor Orr's speech talked about the future of New Zealand's monetary policy framework.

New Zealand's government on Thursday announced the initial seven members of the central bank's new monetary policy committee (MPC), which includes three external and four internal appointees.

The new monetary policy committee (MPC) will make its first decision at the next cash rate review on May 8 and will transfer power on rate changes from the governor alone to a panel of bank staff and external members.

The MPC's remit follows RBNZ's existing goals of keeping medium-term inflation between 1-3 percent and supporting maximum sustainable employment.

He said that the country enjoys low and stable inflation, low unemployment, and broad financial stability but this advantageous position must never be taken for granted.

"In addition to maintaining the status quo, we have new and significant long-term economic challenges among which central banks operate," Orr said in his speech.

He said the bank has to deal with global economic inter-dependence, dominant financial institutions, significant debt burdens, technological change that challenges employment and financial inclusion norms, climate change, and much more.

Moving from a high-inflation environment to a low-inflation one was an amazing achievement for the bank, he said, but it should not now be assumed that low inflation is a given.

Orr said while unemployment is currently low in New Zealand, it is, and will continue to be, one of the defining issues of any society.

"Historically, the bank has always taken labour market developments into account while formulating monetary policy," Orr said.

"Over time, this has been encouraged by our increasingly flexible approach to inflation targeting." (Reporting by Praveen Menon; Editing by William Maclean and Diane Craft)

2019-03-29 00:53:30

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