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Data Flash RBNZ Governor Brash Resig

Data Flash (New Zealand) RBNZ Governor Brash Resigns

RBNZ Governor Brash's surprise resignation, announced on Friday, is effective immediately.

Deputy Governor Roderick Carr will be acting Governor until a successor is appointed, which is likely to take several months.

The market reaction (weaker NZD and lower yields) suggests that the market expects a less hawkish Governor to be appointed. However, we view the expectation of a different medium- to long-term policy profile as premature. We expect the RBNZ to proceed with the near-term policy course announced by Brash in March, with 25 bps increases in the OCR likely after the May, July and August review dates.

Brash resignation a surprise

RBNZ Governor Brash announced his resignation today. He will become a candidate for the National Party in this year's general election and has been guaranteed a high ranking on the party's candidate list. That will ensure his election to Parliament and it is likely that he will become the Opposition's Spokesman for Finance. Current opinion polls suggest that the chances of a change in government and Brash becoming Minister of Finance later this year are very low.

Don Brash became RBNZ Governor on 1 September 1988 and his third 5-year term was due to end in August of next year. Speculation about his potential successor had already begun and today's announcement simply brought the process forward by about one year.

Acting Governor Roderick Carr expected to proceed with rate hikes Deputy Governor Roderick Carr has been appointed Acting Governor until a Brash successor has been found. The selection process will involve the RBNZ Board proposing a successor to the Minister of Finance. That could take several months, with an appointment unlikely before July. The new Governor may not take up the role until October and it is our interpretation that the Government would prefer to appoint an external candidate to the position.

Acting Governor Carr is generally viewed as being at the hawkish end of the spectrum of key RBNZ personnel. However, since he will be in a caretaker role, it is unlikely that he will deviate from the policy course implemented and signalled by Brash over recent months. That suggests that the Bank will be intent on removing the remaining monetary policy stimulus. We expect 25 bps tightening moves on each of the next three review dates (15 May, 3 July and 14 August) to take the OCR to 6.0%.

We disagree with market expectation of softer medium-term policy The market reaction following the Brash announcement, including a weaker NZD and a limited sell-off in bonds, suggests an expectation that the next RBNZ Governor may be less hawkish than Don Brash. However, considering that the Minister of Finance has stated that the change in Governor will not be accompanied by a change in the operating framework (including the 0-3% target range), it is unlikely that the new RBNZ Governor will take a substantially different approach to running monetary policy over the medium to long term. Differences to Don Brash will more likely to be confined to operating style and tactical issues, e.g. the timing of policy moves.

In summary, we do no expect any substantial implications from the Brash announcement. In our view, significant market moves, particularly driven by off-shore reactions to the departure of the well-known figure at the helm of the RBNZ, will provide good trading opportunities. In particular, we see continued upside potential for the NZD, driven by global USD weakness. We therefore view any Brash related dips as buying opportunities.

Ulf Schoefisch, Chief Economist, New Zealand

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