Monetary policy to remain stimulatory

Release date
23 April 2015

The Reserve Bank today said it will ensure that monetary policy is stimulatory to support output growth above potential, to help lift inflation back to target.

Assistant Governor Dr John McDermott said that the near-zero inflation New Zealand is seeing is mostly due to low tradables inflation, caused by the slow global economic recovery, the high exchange rate, and the recent sharp falls in oil prices.

"There is little monetary policy can to do influence inflation outturns in the near term," he said in a speech to the Waikato Chamber of Commerce and Industry and Waikato branch of the Institute of Directors, in Hamilton.

Dr McDermott said that the impact of some factors influencing headline inflation will prove temporary. Past declines in oil prices will reduce headline inflation substantially in 2015, but if there are no further falls, then this negative contribution will drop out of the annual inflation rate by the start of next year.

"Our approach, as a flexible inflation targeter, is to support ongoing sustainable growth in New Zealand." Dr McDermott said that stimulating output growth above potential will help lift non-tradables inflation, returning headline inflation gradually to the target midpoint.

"Growth is currently underpinned by high net immigration, strong employment and construction activity, and robust household spending.

"At present, the Bank is not considering any increase in interest rates. Before considering any tightening in monetary policy we would need to be confident that increased capacity utilisation and labour market tightness was generating, or about to generate, a substantial increase in inflation.

"Evidence of weakening demand and domestic inflationary pressures would prompt us to consider lowering interest rates. There are some areas of uncertainty surrounding the outlook for capacity pressures, including the lingering effects of the recent drought in parts of the country, fiscal consolidation, lower dairy incomes and the impact of the exchange rate on export and import substitution industries.

"Beyond these factors, we are also assessing the outlook for tradables inflation that is being dampened by global conditions and the high exchange rate. The fact that the exchange rate has appreciated while our key export prices, such as dairy, have been falling, is unwelcome."

Dr McDermott said that the Bank remains vigilant in watching wage bargaining and price-setting outcomes. Should these settle at levels lower than our target range for inflation, it would be appropriate to ease policy.

"This cycle is unusual in that CPI inflation is staying very low, requiring interest rates to also remain low. The timing of future adjustments in interest rates will depend on the evolution of inflationary pressures in both the traded and non-traded sectors. We continue to monitor and carefully assess the emerging flow of economic data."

Read the speech: The dragon slain? Near zero inflation in New Zealand

Media Contact:
Mike Hannah, Head of Communications,
Ph 04 471 3671, 021 497 418, mike.hannah@rbnz.govt.nz