NZ Needs to Maintain Inflation Target, Former RBNZ Chairman Says

New Zealand must guard against making its inflation target any looser because of the economic pain required to rein in prices, according to former central bank Chairman Arthur Grimes.

“It’s been loosened steadily over the years,” Grimes said in a Radio New Zealand interview today. “It’s fine as it is now. It’s absolutely vital not to loosen the target further.”

New Zealand’s central bank is required by the government to keep average annual inflation in a 1 percent to 3 percent range in the medium term. Governor Graeme Wheeler, who came into the role in September last year, agreed to focus on the 2 percent midpoint.

Consumer prices rose 0.7 percent in the second quarter from a year earlier. The central bank last month forecast annual inflation will reach 2 percent in mid-2015.

The Reserve Bank of New Zealand was the first central bank with a legislated inflation target, initially set at 0 percent to 2 percent in 1989, before the top bound was raised to 3 percent in 1996. The lower bound was raised in 2002.

Grimes’s comments come as political parties such as New Zealand First call for the central bank to target employment and the exchange rate when its sets interest rates.

“It’s really important not to expect monetary policy to do too much,” he said. “If you lose the focus of it you can make every outcome worse, even the ones you are supposedly trying to achieve.”

Grimes stood down as chairman on Sept. 18 after a decade in the role. Under the New Zealand model, the governor has the sole decision making role on policy and the board has an oversight role, making sure the bank is well run and policy is set in accordance with the target.

To contact the reporter on this story: Tracy Withers in Wellington at twithers@bloomberg.net

To contact the editor responsible for this story: Stephanie Phang at sphang@bloomberg.net

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