RBNZ urged to abandon inflation targeting policy by NZIER

Reserve Bank urged to abandon inflation targeting policy by NZIER

By Edwin Mitson

Dec. 1 (BusinessDesk) - The Reserve Bank should abandon targeting inflation because the 25-year-old policy is no longer fit for purpose in the modern economic environment, the New Zealand Institute of Economic Research says.

The Reserve Bank adopted the then-radical policy in the early 1990s to try to ensure stable prices. However in 2015, it finds itself in a difficult position of whether to leave interest rates on hold at 2.75 percent and miss its inflation target, or lower interest rates but risk a sharp rise in asset prices. Its next announcement is due on Dec. 10.

The NZIER's Christina Leung and Kirdan Lees argue in a paper that the policy of inflation targeting has been rendered out of date by improvements to logistics, new technologies like fracking which have lowered the cost of oil, and the adoption of devices which enable customers to access information on products quickly and easily.

Instead they call for a policy of targeting income growth, which is a figure generated by adding inflation to gross domestic product. They say this would allow the Reserve Bank to be more flexible if the economy is hit by a supply shock, such as a drought, or if demand collapses, as occurred during the global financial crisis. Under this policy, they say, current interest rates are about right.

The authors argue that if inflation continues below target for much longer it will be difficult to make the case that temporary factors, which the central bank can 'look through', are responsible.

(BusinessDesk)

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