UPDATE 2-New Zealand central bank adds employment goal in new policy deal

* RBNZ required to support "maximum sustainable employment"

* Inflation target of 1 percent to 3 pct remains unchanged

* Added goal should not make much difference normally -Orr (Updates throughout)

WELLINGTON, March 26 (Reuters) - The Reserve Bank of New Zealand (RBNZ) included "maximizing sustainable employment" in a new policy agreement with the government on Monday, while maintaining the original mandate's goal of 1 percent to 3 percent inflation.

The greater focus on employment in the fresh mandate marks a shift for the RBNZ, which in 1989 was the first central bank to adopt an official inflation target, and fulfils the new Labour-led government's campaign promise to promote job creation.

The agreement takes effect from March 27, when Adrian Orr starts his five-year term as the central bank's governor, the RBNZ said in a media release. Orr will no longer have sole power on interest rate decisions, with a monetary policy committee of five to seven members expected to begin operation in 2019 following passage of amended legislation.

In a news conference following the signing of the agreement, Orr said in normal times the new employment goal should not make a difference, but could provide more ammunition in extreme scenarios, such as the 2008-2009 global financial crisis (GFC).

"In general times it should not make too large a difference, because we're always considering short-term volatility in employment and output when thinking about interest rate decisions," Orr said.

"But there can be times, for instance an economic shock or an extreme business cycle, where you have to really trade off short-term inflation versus employment."

Orr gave the example of the stagflation period of the 1970s, when inflation was rising alongside unemployment and when there was an added weight on price stability.

"Vice-versa, during economic shocks, negative shocks, monetary policy had shown an enormous ability to stabilize economies globally, for example, through the GFC," Orr said.

Orr welcomed the intention to use a monetary policy committee decision-making group. The majority of members will be Reserve Bank internal staff. Minutes and a non-attributed vote count will be published.


Orr served as deputy governor of the RBNZ for four years before joining the New Zealand Superannuation Fund in 2007. He also served as chief economist at the RBNZ between 1997 to 2000, a period analysts describe as the "heyday" of strict inflation targeting.

The addition of the employment goal brings the RBNZ's framework in line with the mandates of the U.S. Federal Reserve and the Reserve Bank of Australia.

Analysts say the new mandate may mean more dovish monetary policy in New Zealand in adverse conditions. Finance Minister Grant Robertson said in November a broader mandate could mean looser monetary policy at times.

For now, the market is almost unanimous in its expectations the RBNZ will hold rates steady at a record low of 1.75 percent for the rest of the year.

"While the changes announced today are an acknowledgement of how monetary policy best practice has evolved, the RBNZs role remains the same and the policy outlook is unaffected," ANZ analysts said in a note.

"We do not expect the RBNZ to tighten monetary policy until the second half of 2019, broadly consistent with the Banks own views."

Though its economy's size ranks only 53rd in the world, New Zealand has earned a reputation for economic experimentation and a free market approach in the past three decades. Its inflation targeting strategy soon became global economic orthodoxy.

But New Zealand is now becoming the third central bank member of the Bank for International Settlements (BIS) to amend its official mandate in relation to employment since the global financial crisis.

Its new centre-left government has said adding a job-creation goal indicated that full employment should be a goal for New Zealand's entire "economic architecture," while preserving the central bank's operational independence. (Reporting by Marius Zaharia in WELLINGTON, Wayne Cole and Swati Pandey in SYDNEY Editing by Matthew Mpoke Bigg and Paul Simao)