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Inflation the test of Reserve Bank agreement

Inflation the test of Reserve Bank agreement

The business community should be watching inflation outcomes closely following the announcement of the new Policy Targets Agreement (PTA) between the Finance Minister and new Reserve Bank Governor, Business NZ says.

Chief Executive Simon Carlaw says an amendment from 0-3% to 1-3% may not appear to be significant, but it would be damaging if it increased inflationary expectations and therefore higher inflation outcomes.

“No one would benefit from a return to higher inflation and the higher interest rates that would inevitably result. Higher inflation also erodes real wages and savings and erodes exporters’ international competitiveness,” Mr Carlaw said.

“But the new PTA’s requirement for the Reserve Bank to take a medium-term approach to achieving price stability is welcome.

“There have been concerns that the Reserve Bank has been fixated on short-term inflation outcomes and that this has in the past resulted in rapid and large fluctuations in interest rates, when a more patient approach might have been called for. Last year’s Independent Review of the Conduct of Monetary Policy also recommended writing such an explicit medium term approach into the PTA.

“Monetary policy is just one ingredient in an overall recipe to improve New Zealand’s growth performance. The Government must ensure that all of its economic, social and environmental policies are focused on lifting New Zealand’s rate of long-term sustainable economic growth. While the Government has said good things about its growth priorities, it must now deliver. This has to include addressing policies that go in the opposite direction. “

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