New Zealand’s central bank, which pioneered inflation targeting in the 1980s, said it could have cut borrowing costs more than it did in recent years had it more accurately predicted how low prices would stay.
“If the bank had anticipated the extent to which inflation has stayed so low, it probably would have been appropriate for the Official Cash Rate to be lower than has been the case,” the Reserve Bank said in its quarterly monetary policy statement today. Still, “had the OCR been reduced, given the inflation outlook now faced, it is likely that the bank would already be tightening monetary policy,” it said.
Governor Graeme Wheeler spurred gains in the currency today when he said the benchmark rate will probably need to rise next year after being held at a record-low 2.5 percent since early 2011. Inflation has stayed below the RBNZ’s 1 percent-to-3 percent target band since the third quarter of 2012, when Wheeler replaced Alan Bollard as central bank chief.
“Hindsight is a wonderful thing and there could have been scope to lower rates a bit more,” said Nick Tuffley, chief economist at ASB Bank Ltd. in Auckland and a former RBNZ economist. “But it isn’t just the RB that’s tended to overestimate inflation in the past 18 months.”
The “stronger-than-expected” New Zealand dollar has damped prices on imported goods, while domestic price pressures have been “softer than anticipated,” the Reserve Bank said. Had the benchmark been lower, pressure on the housing market could have increased, it said.
Wheeler said one of the reasons rate increases are likely in the first half of 2014 is the risk that the overheating housing market will spill over into broader inflation pressures.