RBNZ Needn’t Rush to 2% Inflation Target, Former Governor Says

  • Brash says economy can handle low inflation, brief deflation
  • Says 2% inflation rate means prices double every 35 years

New Zealand’s central bank needn’t be in a rush to return inflation to its 2 percent target, according to former governor Don Brash.

The economy can handle less inflation or even a brief period of deflation, Brash, who was governor from 1988 to 2002, said in an interview. Inflation has been below the Reserve Bank’s 1-3 percent target range for six straight quarters, and hasn’t reached the 2 percent midpoint it aims for since 2011.

“Why we should be panicked when for a while it’s briefly under 2 percent I don’t understand,” said Brash, 75, who oversaw the introduction of inflation targeting in 1990 that helped to tame rampant price increases. Asked if New Zealand is too fixated on getting back to the middle of the target, he said “I personally think we are.”

RBNZ Governor Graeme Wheeler has cut interest rates five times since June to a record low, as he attempts to boost inflation toward 2 percent. Lower borrowing costs are fueling a housing boom, posing a risk to financial stability and prompting Wheeler to consider further prudential measures to curb mortgage lending.

“How does he keep inflation up while not further igniting the property market around the country?” said Brash. “He has limited instruments to deal with that. The single biggest instrument is not in his control, and that’s land supply.”

RBNZ’s Mandate

Under the policy targets agreement with the government, the central bank is required to target 2 percent inflation on average over the medium-term. Wheeler said in a February speech that the PTA afforded him considerable flexibility and it would be wrong to cut rates mechanistically in response to low inflation.

“Two percent we regard as a good measure of price stability,” Brash said. “That doubles the level of prices in 35 years. Hells bells, that doesn’t sound like price stability to me.”

New Zealand was on the cusp of deflation when consumer prices rose 0.1 percent in the 12 months through December. A period of falling prices was unlikely to delay spending or disrupt the economy, said Brash.

“For most things, we’re not going to stop buying with some prospect of a modest 1 to 2 percent fall in price over the next 12 months,” he said. “Will people stop buying because prices go down? That’s a nonsense argument.”

iPhones, Groceries

Consumers will buy iPhones, knowing perfectly well the price will be 50 percent less in six months or 12 months, or buy grocery items knowing they might be cheaper in a few weeks’ time, he said.

Consumer prices rose 0.4 percent in the year through March, and the central bank doesn’t forecast 2 percent inflation until 2018.

The annual inflation rate was less than 3 percent when Brash stepped down in 2002, down from a peak of almost 19 percent in 1987. He said he “remains very comfortable” with the RBNZ’s mandate of achieving price stability, noting the challenges faced by peers such as the Federal Reserve or the Reserve Bank of Australia, which have additional mandates to maximize employment.

“I suspect in their heart of hearts they wish profoundly they had a single mandate,” he said. “They know that with one instrument they can’t deliver two targets.”

The RBA cut rates this month after core inflation slowed to the weakest on record in the year through March. Still, lowering the central bank’s 2-3 percent inflation target would be “wildly premature”, RBA board member John Edwards told the Wall Street Journal last week. Australia’s annual inflation rate has been below 2 percent since the third quarter of 2014.

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