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Inflation targeting binds New Zealand central bank in changing economy: report

Xinhua, December 1, 2015 Adjust font size:

New Zealand's central bank should abandon outdated inflation-targeting to manage economic growth in a changing global environment, the country's most prominent economic think-tank said Tuesday.

Inflation-targeting -- whereby the Reserve Bank of New Zealand (RBNZ) raises or cuts interest rates to discourage or encourage demand -- was no longer "fit for purpose," said a report from the New Zealand Institute of Economic Research.

"Today, the battle is not so much demand, but negotiating a myriad of shocks to the way firms supply goods," said the report.

"These shocks include improvements in logistics that make it easier and faster to deliver goods to consumers, new technologies like fracking which make extracting oil cheaper, and new devices that place product information at consumers' fingertips. Globalization and the Internet have greatly increased competitive pressures across the globe. New Zealand is no exception."

The RBNZ was currently "in a bind" as inflation was undershooting its target rate of 1 percent to 3 percent, but lowering the official cash rate -- currently at 2.75 percent -- to stimulate demand could "risk an asset price spiral."

The report suggested that targeting income growth -- the sum of inflation and economic growth -- looked the best option to deal with new economic conditions.

"Nominal GDP targeting seems like an increasingly sensible framework for setting monetary policy delivering a better mix of inflation and GDP growth," said the report.

The RBNZ has repeatedly warned of the risks of an overheating housing market to the country's financial stability, but has been unable to combat soaring prices with interest rate hikes because inflation has been below target. Endit