RBNZ Determined To Avoid Deflation

RBNZ Determined To Avoid Deflation As Well As Inflation

Reserve Bank Governor Don Brash says "The Reserve Bank is just as serious about keeping inflation above zero as it is about keeping it below 3 per cent."

That's from a speech to a small-business audience in Whangarei in which Dr Brash reviewed the deterioration in global prospects since the 11 September terror attacks and the Bank's subsequent decisions to cut interest rates by a full 1 per cent.

Dr Brash said mostly the Reserve Bank's public statements emphasised keeping inflation down, but in reality the Bank's task was just as much to keep inflation above zero.

"The Reserve Bank is as committed to avoiding deflation as to avoiding inflation, and that means that we will always be leaning against the wind to the best of our ability, tending to tighten policy if inflation looks likely to rise in the future, and tending to ease policy if inflation looks likely to fall below the bottom of our target.

"Inflation going below zero would be just as much a breach of the Reserve Bank's inflation target as having it go above 3 per cent. Deflation causes its own set of economic problems and distortions, doing social and economic damage. And our policy deliberations are always, without exception, mindful of both risks. We are always trying to find the policy setting - the interest rate - which will deliver an inflation outcome which is neither too hot nor too cold.

"This means that, once price stability has been achieved, and as a very rough rule of thumb, the Reserve Bank's monetary policy will be seeking to restrain inflationary pressures by raising interest rates roughly half the time, and will be seeking to restrain disinflationary pressures by lowering interest rates roughly half the time - as we did in the second half of 1998 and as we have been doing through most of this year," Dr Brash concluded.

Dr Brash's speech came at the launch of a nation-wide Roadshow that will see Dr Brash talking at 24 meetings of small- and medium-business operators throughout New Zealand.

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