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Clarification Of Monetary Target Sought

Clarification Of Monetary Target Sought

The Business Roundtable is seeking clarification of the Labour Party's thinking on the Reserve Bank's Policy Targets Agreement.

Executive Director Roger Kerr said that since the Reserve Bank's target range was widened to 0-3 percent for CPI inflation at the end of 1996, the inflation rate has averaged over 2 percent, and for four-fifths of that period it has been above the 1.5 percent mid-point. Currently annual inflation is running at 2.7 percent.

"Clearly the Reserve Bank has been using the full extent of the target range and can hardly be criticised for being inflexible", Mr Kerr said.

"Section 8 of the Reserve Bank Act 1989 states that the primary function of the Bank is to achieve and maintain stability in the general level of prices.

"Statistical lags and quality changes associated with measuring changes in the prices of goods and services in the Consumers Price Index mean that there is a small upward bias in inflation as measured by the CPI. However, New Zealand statisticians, the Reserve Bank and Dr Cullen himself have acknowledged that the bias is not more than 1 percent on average.

"If inflation were to run at average rates towards the upper end of the Reserve Bank's 0-3 percent range, it is difficult to see how this would be consistent with the Act's requirement to maintain price stability.

"For example, an average CPI increase of 2.5 percent over a 10 year period would mean that prices would rise by 28 percent rather than a total of 10.5 percent with average CPI increases of 1 percent.

"An inflation track higher than that achieved by the Reserve Bank over the past five years would be a worry in terms of price stability, and price stability is the best contribution monetary policy can make to economic growth. Higher average inflation would also mean higher interest rates. Moreover, it requires just as much monetary pressure to contain inflation at a stable low rate as at a stable higher rate.

"New Zealand cannot afford to throw away the important gains of low inflation. It is important for business and investor confidence that the government's intentions are clarified", Mr Kerr concluded.


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