Bollard sees inflation abating in second half of target period

By Pattrick Smellie

Thursday 11th December 2008

The Reserve Bank will be comfortable that inflation is under control as long as it is heading into the target range "in the second half of a three-year forecast horizon", the bank says in its Briefing to Incoming Ministers, released today.

"Our numerical target, 'future CPI inflation outcomes between 1% and 3% on average over the medium term', incorporates flexibility. The 'medium term' is not formally defined, but we normally aim to ensure inflation is within the range in the second half of a three-year forecast horizon.

"We are actively assessing how far and how fast monetary conditions should be eased and therefore the path for bringing inflation back "comfortably" within the target range. We are closely monitoring developments here and overseas and policy will continue to remain attuned to new information," said the BIM, which was written before last week's historic 1.5 percentage point cut in the official cash rate.

The BIM was released a day after a strongly worded shot across the bows from the Reserve Bank Governor, Alan Bollard, of the non-tradeable, retail and energy sectors to rein in inflationary pricing behaviour.

It was likely to be early next year before the RBNZ knew whether slower activity was translating into lower underlying inflation, but the bank expected a return to slow rates of economic growth from early 2009.

Citing world financial market volatility as the most extreme since the First World War and exceeding that experienced in the 1929 crash, the RBNZ said its job was being made far more difficult because financial market volatility was making the lines between financial and macro-economic stability "increasingly blurred".

Accordingly, the RBNZ could not afford to be "trigger happy" in responding to new events, but should use the full width of the target range, in light of particular shocks as they arose. Now was not the time to consider modifications to the Policy Targets Agreement, as there were no clear cut improvements available and any changes would be likely to impose their own new costs.

The Bank reported that it was well placed as a "full service" central bank to be fully informed and engaged in the economic and financial system, while it has been weathering extreme international disorder.

www.businesswire.co.nz

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