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Moody's Analytics questions use of NZ inflation targeting


New Zealand's inflation is so well and truly beaten the Reserve Bank should consider adding an economic growth component.

Wed, 11 Jul 2018

New Zealand's inflation is so well and truly beaten the Reserve Bank should consider adding an economic growth component to the way it conducts monetary policy, says Moody's Analytics, an offshoot of global credit rating agency Moody's Investors Service.

"The monetary policy could be altered to use nominal Gross Domestic Product as a reliable metric for prices and real activity," says analyst Hector Lim in a research note released today.

The commentary followed the widely expected decision by the RBNZ to hold its benchmark official cash rate at a historically low 2.5 percent it has held for more than two years, and repeated its concern the New Zealand dollar is over-valued and stifling export growth and import substitution industries.

The strong kiwi was preventing New Zealand's economic recovery from "gaining traction", says Mr Lim, but the RBNZ feared lowering interest rates because it could fuel a housing boom that is threatening to emerge.

"The New Zealand central bank has become so successful at influencing medium and long term expectations that consumer prices are becoming increasingly disconnected from the real economy.

"This raises the question, is it still worth pegging monetary policy to an inflation target?"

The comments are grist to the mill for Labour and Green party finance spokesmen, who have been urging a monetary policy rethink.

"The central bank could phase in a nominal GDP target to help influence policy decisions," Mr Lim's note says. "In doing so, it would be able to adjust monetary policy in a transparent manner that allows for movements in both the real economy and prices."

Such an approach clould have seen the RBNZ tighten monetary policy more aggressively to act against the consumer and home borrowing debt boom in the mid-2000s and might have cut rates more sharply in the downturn that accompanied the global financial crisis.

(BusinessDesk)

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Moody's Analytics questions use of NZ inflation targeting
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