Aggressive cuts would fire up prices: Wheeler

"As a general principle we support inflation targeting." Finance Minister Bill English

Speeding up cuts to interest rates would be unsustainable and further inflame an ‘‘already seriously overheating property market’’, Reserve Bank governor Graeme Wheeler says.

But he says changing the central bank’s inflation targets is not the answer, a view shared by Finance Minister Bill English, while also defending his approach to rate cuts.

Wheeler’s speech to the Otago Chamber of Commerce, delivered by assistant governor John Mcdermott yesterday, explained how monetary policy expectations often ran ahead of reality.

This was because the influence of monetary policy, particularly in small, open economies, was ‘‘heavily constrained’’ by global economic and financial factors.

Wheeler said the Reserve Bank still expected a further 35 basis points to be cut from interest rates, and dismissed claims it should either hold the rate at its all-time low, or rapidly reduce it.

There was a view that rapidly lowering rates would bring inflation back within the policy targets agreement of between 1 per cent and 3 per cent, but Wheeler said this would ‘‘not be regarded as sustainable’’.

‘‘Rapid and ongoing decreases in interest rates would likely result in an unsustainable surge in growth, capacity bottlenecks, and further inflame an already seriously overheating property market,’’ he said. ‘‘It would use up much of the bank’s capacity to respond to the likely boom-bust situation that would follow.’’

Wheeler said the inflation target was still the most appropriate framework and the bank was ‘‘committed’’ to achieving the inflation goals.

English said there was a regular cycle of looking at the targets agreement every five years or when a new government came to office and that was ‘‘appropriate’’.

‘‘But as a general principle we support inflation targeting and what you see happening around the world is reserve banks certainly not giving away inflation targeting – in fact going to extremes to try and achieve inflation targets.’’

Asked if he would be comfortable with official interest rates at zero, he said it was the central bank’s job to make that decision.

Labour finance spokesman Grant Robertson said Wheeler’s speech showed current monetary policy needed to be reviewed.

The Reserve Bank Act was nearly 30 years old and the world had changed ‘‘hugely’’ since then, he said. ‘‘It is clear from evidence overseas that our monetary policy targets need to be updated to adapt to the ‘new normal’ of low inflation and stalled growth.’’

NZ First leader Winston Peters said Wheeler had ‘‘waved the white flag’’ by admitting the Reserve Bank was a ‘‘spectator when they ought to be a player’’.

A ‘‘major overhaul’’ was needed, Peters said, because inflation targeting was past its use-by date.