RBNZ Finds Persistent Bias Overestimating New Zealand Inflation

New Zealand’s central bank has identified a “persistent bias” in its inflation forecasts that resulted in it overestimating price pressures in recent years.

“Since 2010, the bank has consistently overestimated inflation at all forecast horizons,” the Reserve Bank’s economics department wrote in an Oct. 31 paper released to Bloomberg News under the Official Information Act. “Assessing this directional bias is important as it may lend some insight into the drivers of inflation errors” and “guide policy makers’ judgments about the likely persistence of weak inflation,” according to the paper.

Prime Minister John Key yesterday defended Governor Graeme Wheeler’s performance as inflation holds below the bank’s 2 percent target for a fourth straight year. After increasing interest rates four times last year to ward off inflation that never eventuated, Wheeler began cutting them again this month.

“No one is expecting perfection from the Reserve Bank governor,” Key said. “They do their best to read all of the tea leaves and come up with what they think are the right policy settings.”

Still, Finance Minister Bill English said in an interview last week that Wheeler needs to get inflation back to target. “He’s been out of the zone for years now, below the midpoint for quite a long time,” English said.

Rate Cuts

The central bank on June 11 cut the official cash rate a quarter point to 3.25 percent, and economists expect further reductions.

Wheeler, who started a five-year term as governor in September 2012, has said last year’s rate increases weren’t a mistake as no one could have predicted the big drops in oil and dairy prices that were to occur.

“The RBNZ is always reviewing its forecasting performance,” a spokesman for the bank said Tuesday.

The RBNZ’s board of directors monitors the bank’s performance and determines whether policy statements meet the requirements of the Reserve Bank Act.

The paper, presented to the board Nov. 20, said that between 2010 and the third quarter of 2014, the RBNZ’s forecast errors for quarterly inflation averaged 0.2 to 0.35 percentage point across various horizons.

“The bank has overestimated both tradables and non-tradables inflation at most horizons,” it said.

The errors weren’t unique to the bank and therefore don’t point to issues with its forecasting processes, the paper said.

“The analysis presented in this paper shows that the bank’s forecasts recently have been very similar to those of external forecasters.”

The paper said the bank has investigated low inflation out-turns on several fronts, including re-examining underlying drivers of price pressures. Other measures to improve forecasting included reviewing models and looking at international experience with low inflation, the paper said.