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RBNZ backs inflation targeting, wants wider forecasting framework

Tuesday 19th June 2012

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The Reserve Bank backs inflation targeting as its primary goal, and wants a broader forecasting model to investigate what can lead to a disappointing economic recovery.

Assistant governor John McDermott told bankers in Hong Kong "inflation targeting as a monetary policy framework has been largely successful at keeping inflation in check," something that aided the central bank during the 2008 global financial crisis. The target also meant the housing boom through much of the past decade didn't impact on prices as much as the oil shocks in the 1970s.

"With low inflation and the credibility of inflation targeting came much lower volatility in the general level of prices," McDermott said. "This credibility was very helpful when the global financial crisis hit."

The central bank's positioning comes as Opposition political parties push for a review of the bank's policy target agreement beyond merely inflation, saying it should be able to deflate a rampant exchange rate that's hindering the export sector.

McDermott said the bank's monetary policy framework can be improved, especially the way it monitors monetary and credit information.

"Our forecasting frameworks need to be expanded so we can examine possible sources of the disappointing recoveries, such as say the impact of the overhang of public and private debt on the economy," he said.

The International Monetary Fund singled out New Zealand's ballooning international liability as the single biggest risk to the economy, and Governor Alan Bollard has cited that external imbalance as the reason why the strength of the kiwi dollar is unsustainable.

Last week, Bollard kept the official cash rate on hold at 2.5 percent, and trimmed the bank's forecast track for the 90-day bank bill rate, often seen as a proxy for the OCR, with the rate unchanged at 2.7 percent until June 2013. It had previously flagged a rate hike in December this year.

McDermott said the forecast track of the 90-day bank bill rate differed from most other central banks, but didn't appear to have made a difference in its ability to keep inflation within a target band of 1 percent and 3 percent.

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