Zero interest rates an ‘unlikely’ option

The Reserve Bank’s head of economics has not ruled out the official cash rate falling to zero, although it was unlikely.

In an interview with Radio New Zealand, assistant governor Dr John McDermott, the bank’s head of economics, was asked what the central bank would do to stoke inflation.

‘‘We’ll do what is appropriate and we’ll take the time that’s required to do it,’’ he said.

Asked if this meant he was not ruling out zero interest rates, McDermott indicated it was possible, but unlikely.

‘‘I never rule anything out, but I don’t think we’re going to get there.’’

The Reserve Bank has been struggling to maintain household inflation within the target band of 1 per cent to 3 per cent.

Governor Graeme Wheeler has lowered the OCR to a record low of 2 per cent and indicated it could go lower over time. But this is still high by the standards of other advanced economies, where rates are mainly close to zero.

McDermott also indicated that while the economy was still growing strongly in comparison with most other Western economies, this was mostly to do with rapid population growth, driven mainly by record net inward migration.

Finance Minister Bill English has denied in Parliament that this is correct.

‘‘The correspondence [between the rate of population growth and economic growth] is very high,’’ McDermott said.

‘‘These extra people are adding both demand in the system and services, but they’re also adding supply.’’