New Zealand Sees No Case to Change RBNZ’s Inflation Targeting

  • Treasury signals no desire to ditch framework RBNZ pioneered
  • Policy Targets Agreement is reviewed ahead of 2017 renewal

New Zealand is likely to maintain an inflation-targeting framework for monetary policy when the government renews its Policy Targets Agreement with the central bank next year, the Treasury Department said.

“Our view is that no case has yet been made to change our current framework and there would be a high hurdle before going down that path,” Treasury spokesman Bryan McDaniel said in an e-mail Tuesday. Canada, Sweden and the U.K. have recently undertaken monetary framework policy reviews and none of those led to a move away from inflation targeting, McDaniel said. The comments were first reported by Radio New Zealand and

Reserve Bank Governor Graeme Wheeler, whose first term ends in September 2017, has so far failed to achieve the midpoint of his 1-3 percent inflation target, stirring debate about whether the goal remains appropriate in an environment of weak general price pressures but an overheating housing market. Treasury reviews the PTA before it is signed by the Finance Minister and the governor at the outset of each new five-year term, and has already begun that process, McDaniel said.

“We regularly review New Zealand’s monetary policy framework in advance of the signing of a new PTA, which either stays the same or gets amended,” he said. “We will be looking closely at domestic and international developments to ensure our framework remains fit for purpose.”

Record Low

Wheeler has cut his benchmark rate to a record low of 2.25 percent and signaled further easing will likely be needed to boost inflation, which is running at just 0.4 percent. At the same time, low borrowing costs are fueling a housing boom that’s seen prices in Auckland almost double since 2007.

Wheeler took over as governor in September 2012 and has yet to indicate whether he will seek a second term.

New Zealand pioneered inflation targeting when the Reserve Bank Act was passed in 1989, ensuring the central bank was independent of the government and could set interest rates as it wished to achieve its inflation goal. More recently, the government’s political opponents have called for a broader mandate for the RBNZ to also target employment, economic growth or the exchange rate. A general election is due late next year.

Before it's here, it's on the Bloomberg Terminal.