Reserve Bank mystified by low inflation

  • 13/07/2016
Reserve Bank mystified by low inflation

The Reserve Bank is trying to understand why inflation has consistently undershot expectations over the past six years, which it sees as a strategic priority this year, assistant governor John McDermott says.

In a speech on Wednesday explaining how the central bank arrives at policy decisions, Mr McDermott told the Manawatu Chamber of Commerce that the bank's forecasting team hadn't predicted the persistent weakness in inflation or the persistent strength in the New Zealand dollar.

It wasn't alone in being baffled by protracted low inflation and had been shifting resources to boost its understanding.

"The persistent period of weaker than expected inflation remains a focus for the bank, and the bank's research programme is shedding light on the drivers of low inflation," he said.

"Increasing our understanding of low inflation is a strategic priority."

The bank is projecting the consumer price index will have risen 0.6 percent in the June quarter when the figures are released next week for an annual pace of 0.6 percent.

The bank's mandated measure of inflation has tracked below the target 1 to 3 percent band since September 2014 as a strong Kiwi dollar and cheap oil prices keep imported inflation low, while record migration removes pressure on wage increases.

The bank refrained from cutting interest rates last month, waiting instead for the June economic and inflation figures. Governor Graeme Wheeler has been balancing the weak level of inflation against the risk posed to the country's financial stability by rising house prices.

Mr McDermott outlined how the bank makes its policy decisions, without providing any guidance for next month's review, saying the greater role of committees "mean the bank now relies less on the single decision maker model" and "allows the consideration of a greater range of viewpoints".

Mr Wheeler would only have the final say if there wasn't a majority or consensus view on policy options, he said.