Lower inflation triggers RB rethink
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 per cent 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 the consumers price index between 1 and 3 per cent with a focus on the mid-point. Annual inflation was 1.9 per cent in the three months to September. Its latest forecasts show it expects to begin lifting rates in mid-2019.
Spencer yesterday 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 weaker and higher traded goods inflation. “This would likely put upward pressure on domestic interest rates,” he said.
The New Zealand dollar rose to US68.86 cents as at 1.47pm versus US68.63 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.