Res Bank emphasises flexibility

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Grant Spencer
Grant Spencer
The Reserve Bank yesterday used a speech to emphasise its approach to monetary policy had become increasingly flexible.

Acting governor Grant Spencer delivered a speech called ''Low inflation and its implications for monetary policy'', in which he said inflation had been persistently low since the global financial crisis, both in New Zealand and globally.

Initially, it was related to a long period of weak demand as firms and households repaired their balance sheets. However, low inflation had persisted as activity had recovered and unemployment had fallen.

A consistent pattern across many countries suggested global supply-side factors had been at work, he said.

''It is fair to say our flexible inflation targeting approach is becoming more flexible. In pursuing our long-term price stability objective, relatively more weight is being attached to the stabilisation of output and employment in the short to medium-term.

''In this respect, the Reserve Bank's direction was consistent with the Government's intention to introduce a dual mandate for monetary policy.''

Such an approach could only be sustained if inflation expectations remained low and stable, Mr Spencer said.

Monetary policy would only have greater scope to stabilise the real economy if its long-term commitment to price stability was maintained.

ASB chief economist Nick Tuffley said it was important to note Mr Spencer's caveat about the added weight on the real economy could only be sustained if inflation expectations remained well anchored.

That came against the backdrop of the Government intending to add an employment objective alongside the Reserve Bank's current price stability objective.

A key conclusion from the speech was the Reserve Bank needed to be flexible and patient in its actions to get inflation back to about 2%, he said.

That would balance against being too rigid in driving inflation back to target and embraced the avoidance of unnecessary economic volatility.

In the absence of an increase in non-tradeables inflation late next year, as the Reserve Bank was currently forecasting, the bank would ''have to consider'' further easing, particularly if global inflation remained weak.

Mr Tuffley said it was clear the Reserve Bank was balancing two offsetting risks. -

The risk global inflation accelerated, against its new assumption persistent weak global inflation would continue.

The risk drivers of weak domestic inflation pressures persisted, meaning non-tradeable inflation would not rise as soon as the Reserve Bank was currently assuming.

''It will take time for uncertainties around these key inflation drivers to become more apparent ... We continue to see the Reserve Bank remaining on hold until early 2019.''

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