Reserve Bank Governor defends rates hold

Reserve Bank Governor defends rates hold

The Reserve Bank Governor has defended his decision not to cut the official cash rate, despite headline inflation falling short of the bank's 1 to 3 percent target, at just 0.1 of a percent.

Graeme Wheeler says the low inflation is primarily because of a negative tradables sector and a 75 percent drop in oil prices since the Global Financial Crisis.

He told the Canterbury Employers' Chamber of Commerce he won't use a "mechanistic approach" to the inflation target, because he also has to consider other factors like house prices, financial stability, volatility in output, interest rates and the exchange rate.

The Policy Targets Agreement (PTA), which defines stability as increases in the Consumer Price Index of between 1 and 3 percent, was signed in 2012.

Mr Wheeler says headline inflation is falling nearly everywhere across the globe and is below target for 30 other economies whose central banks are seeking flexible inflation targeting.

"Low oil prices are recognised in the PTA as a factor that can legitimately cause inflation to be outside the target band. It would be inappropriate to attempt to offset the low oil price through the OCR, which tends to influence inflation outcomes over 18 months to two years."

Global growth last year was the slowest since 2009, despite monetary stimulus and falling oil prices.

Mr Wheeler says China still represents the greatest risk to global growth because of its impact on trade volumes and commodity prices. China accounted for 14 percent of global growth in 2014.

He says New Zealand has had a range of shocks since the GFC, including the Canterbury earthquakes, a 70 percent peak-to-trough movement in dairy prices, record net migration, 27 percent house price inflation in Auckland and a slump in the oil price.

The economy is in its seventh year of expansion. It slowed last year primarily because of the sharp decline in dairy prices, but is projected to grow at around 3 percent over the next couple of years.

But there are risks, including the chance of slower growth from China, weaker-than-expected dairy prices and the implications of a serious El Niño event.

Internationally, monetary policy is diverging, with the US Federal Reserve beginning to raise rates and Europe and Japan easing them which could lead to greater volatility and uncertainty.

"Looking ahead, monetary policy will continue to be accommodative. With the ongoing weakness in commodity prices, and particularly oil, it will take longer for headline inflation to reach the target range," Mr Wheeler says.

Annual core inflation sits a 1.6 percent, which is within the target range.

Newshub.

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