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RBNZ considers tweaking monetary policy as low inflation persists, Spencer says

Tuesday 5th December 2017

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The Reserve Bank is considering tweaking its approach to monetary policy in the face of persistently low inflation since the global financial crisis, says acting governor Grant Spencer.

In his first public speech as acting governor, Spencer told the Institute of Directors in Auckland a series of factors including globalisation, the growth of the Chinese economy, new digital distribution channels as well as online competition, an increase in international labour mobility and low inflation expectations "may be reducing the leverage monetary policy has over inflation, although their persistence and impact on inflation in New Zealand remain uncertain."

Last month the central bank kept the official cash rate at a record low 1.75 percent and reiterated "monetary policy will remain accommodative for a considerable period" given tepid inflation. The central bank is mandated with keeping the annual rate of consumers price index between 1 and 3 percent with a focus on the mid-point. Annual inflation was 1.9 percent in the three months to September. Its latest forecasts show it expects to begin lifting rates in mid-2019. 

Spencer today said in the context of the November monetary policy statement, non-traded inflation is forecast to pick up from late 2018 in response to increasing capacity pressures. However, "if this response does not eventuate then we would have to consider a further easing of policy to generate additional domestic demand pressure, particularly if global inflation remains low in line with our forecasts."

He also said if the assumption that weak global inflation will persist proves incorrect, then international interest rates would probably be higher, the kiwi dollar weaker and higher traded goods inflation. "This would likely put upward pressure on domestic interest rates," he said. 

The New Zealand dollar rose to 68.86 US cents as at 1.47pm versus 68.63 cents immediately before the release. 

Spencer said monetary policy hasn't fully offset the weakness in imported inflation which was not expected to be so persistent and has been overlaid with uncertain commodity price movements.

"The ongoing shock has resulted in CPI inflation running below the 2 percent target mid-point. The policy response has been consistent with our flexible inflation targeting framework. More recently we have been assuming greater persistence in low global inflation and this is contributing to our current flat track for future OCR levels," he said. 

Still, he underscored changes in domestic pricing behaviour are causing its flexible inflation targeting approach to "become more flexible," and relatively more weight is being attached to "output, employment, and financial stability." 

However, "this can only be sustained if monetary policy's long-term price stability credentials are maintained," he said.

Spencer's comments come as the government prepares to review the Reserve Bank Act, with a view to including maximising employment alongside the price stability framework and change the decision-making model for monetary policy decisions by introducing a committee approach drawing on external experts alongside officials.


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