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Bollard backs inflation targeting as best in swansong appearance

Thursday 13th September 2012

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Reserve Bank governor Alan Bollard has thrown his support behind inflation as the primary target for the central bank's policy target agreement, and hosed down suggestions moving the official cash rate can have a lasting effect on the currency.

Speaking at his last appearance before Parliament's finance and expenditure committee in Wellington after 10 years in the job, Bollard told politicians the legislation as it stands is "completely fit for purpose," and lets the central bank take things other than price stability into account.

"It does give scope - it's allowed us to deal with a very tight growing housing market back in the 2000s, it's allowed us to deal very, very quickly with a very nasty financial event back in 2008," said Bollard, who also served four years as Treasury secretary before moving to the RBNZ. "We don't regard ourselves as being pushed into a strict suit of strict inflation targeting. We are flexible inflation targeters."

His comments come as a private members bill seeking to broaden the central bank's primary goal to include currency stability, stoke export growth and create jobs gets closer to its first reading in Parliament, and as local manufacturers step up pressure on the government to devalue the currency.

The central bank today hiked its forecast for the currency on a trade-weighted basis, and doesn't see it falling below 70 until the June quarter in 2014. It was previously picking it to drop into the high 60s in the September quarter of the current year.

In response to questioning, Bollard talked down the bank's ability to influence the exchange rate by moving the OCR, saying New Zealand's interest rate differential with its trading partners was only part of the equation, and that market sentiment is the main driver behind the kiwi's strength.

"If it's just being done to try and move the exchange rate around, I wouldn't expect to have that effect. And the markets of course will look right through that," he said.

Had the bank had broader policy targets than primarily inflation, Bollard agreed it may have responded differently to events.

Bollard is leaving the RBNZ, to be replaced by former World Bank senior executive and New Zealander Graeme Wheeler.

BusinessDesk.co.nz

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