Reserve Bank: Zero interest rates an option but ‘unlikely’

The Reserve Bank’s head of economics has not ruled out the official cash rate (OCR) 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 bank would do to stoke inflation.

‘‘We’ll do what is appropriate and we’ll take the required to do it.’’

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 keep the consumer time that’s price index 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 interest rates are mainly close to zero.

McDermott also indicated that while the economy was still growing strongly in comparison to 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.

‘‘They’re offering more services in terms of employment opportunities and so the fact is the econ- omy’s growing but it’s growing because there’s more people.’’

McDermott also indicated the Government should consider using record low interest rates to assess its investment options.

‘‘This is the right time for the Government to think about its infrastructure needs.’’

– Fairfax NZ