Will big Reserve Bank reforms move your home loan rates?

Incoming Reserve Bank Governor Adrian Orr, left, and Finance Minister Grant Robertson after signing the new Policy Targets Agreement at Parliament, NZH Photograph by Mark Mitchell

If you were worried about what the new Government's Reserve Bank reforms would do to your mortgage rates - or your savings account - you can breathe a sigh of relief.

Economists see the new Government's reforms of the Reserve Bank Act as unlikely to change the outlook for interest rates – for now at least.

The Policy Target Agreement, signed with incoming Governor Adrian Orr this morning, will require the Reserve Bank to explicitly include employment in its policy targets ending a sole focus on inflation.

The bank will also move to decide policy by committee instead of leaving interest rate decisions to the governor alone.

The committee will include four internal Reserve Bank members and three external members (from 2019).

But the changes weren't radical enough to prompt economists to change their forecasts for interest rate hikes.

"The new PTA is similar in spirit to its predecessor and we don't think it will alter the conduct of policy much," said ANZ chief economist Sharon Zollner.

The changes were an acknowledgement of how monetary policy 'best practice' had evolved but the RBNZ's role remains the same, she said.

ANZ was sticking to its view that New Zealand's official cash rate won't move until later in 2019.

Westpac economists noted that "employment" is mentioned three times in the new PTA.

But Westpac chief economist Dominick Stephens said the wording allowed for "the fact that the best long-term contribution monetary policy can make to employment levels is to maintain low and stable inflation."

"It is not obvious to us that the RBNZ will implement OCR settings much differently under this wording, although its communication and analytical methods might pivot towards the labour market."

Some economists have highlighted that the changes in addition tot he arrival of the new Governor Adrian Orr could equate to a new direction for the RBNZ.

"Admittedly, this probably won't significantly alter the outlook for monetary policy," wrote Kate Hickie and Capital Economics in Sydney. "But the bigger risk is that the new Governor
prompts a step change in the way policy is conducted."

Orr - who has headed the NZ Super Fund for the past decade - comes with a reputation as a plain speaker with a strong awareness of social issues as well as pure economics.

"Even though Orr is a former employee of the RBNZ it would be unwise to assume that nothing will change under his leadership," Hickie said. "There is no way of knowing for sure how Orr will choose to interpret the PTA. He may be more dovish than his predecessor or perhaps more hawkish.

Hawks lean towards keeping inflation low - lifting interest rates sooner to keep monetary supply tight. Doves take a more expansionary approach, leaving rates lower to boost other parts of the economy.

The changes had been well signalled by finance minister Grant Robertson, who has ordered a wide review of all the Reserve Bank's functions.

Today's PTA signing represented the culmination of Phase one of that review – focusing on monetary policy.

Phase Two will focus on the Bank's regulatory functions and will be announced later this year.

The currency markets were untroubled by the announcement with the New Zealand dollar largely unchanged at US72.4c