English content to wait another year for Reserve Bank policy targets review

Finance Minister Bill English says he's prepared to wait for the scheduled review of the policy targets agreement with the Reserve Bank next year to consider whether it's still appropriate in a global economy where inflationary pressures have dissipated.

The agreement requires the Reserve Bank's monetary policy to keep inflation between 1-3 percent on average over the medium term, with a focus on keeping future average inflation near the 2%  midpoint. Inflation has undershot the target in each of the past five quarters.

Inflation barely registered at a 0.1% annual rate in the final three months of 2015 and has now been below the target band since September 2014. The bank's survey published last month showed expectations for inflation two years out fell to 1.63%, the lowest since 1994, while an ANZ Bank survey showed inflation expectations at a record low 1.39%.

The Reserve Bank has said it can tolerate an extended period of weak inflation because it views the phenomenon as temporary, driven by a slump in oil prices. It's also wary that cutting interest rates further to bolster inflation could inflame the housing market where it has concerns about inflated prices causing financial instability.

"They have got a fairly difficult problem. They don't want to be inflating asset values with interest rates even lower than the 50-year lows they're at, and the economy is actually going along reasonably well but they've got to look out a couple of years and make those decisions," Mr English said.

"I think they're in some challenging territory. We've got an agreement and we're happy that they're acting consistently with the agreement. We are not trying to second guess the decisions the governor should make," Mr English said. "The flexibility is there to allow the governor to make balanced judgments about the economy and PTA accommodates that. We are happy to see that continue and review it next year."

The agreement automatically comes up for review at the end of governor Graeme Wheeler's five-year term in September 2017.

"By then, there will be a bit of a clearer view about where inflation rates are," Mr English said. "Anyone can see there have been some reasonably unusual circumstances, unusual and unpredicted – like the huge drop in oil," he said, adding that lower ACC levies were probably also a factor.

"The economy is growing at a moderate, steady rate, better than most developed economies," he said. "The PTA doesn't seem to be creating significant problems for the economy."

Mr English said he was reluctant to prejudge the outcome of the review, which would include advice from the Treasury but noted he hadn't seen any compelling intellectual argument that the agreement itself could change or any particularly coherent alternative proposal.

"In the long run, the agreement is there to assist in the anchoring of inflation expectations because people think stable, moderate inflation works for an economy. That's the point of it and those objectives haven't changed," he said.

(BusinessDesk)