New Zealand central bank boss admits challenges in inflation target

The governor of New Zealand's central bank has sparked calls for an overhaul of monetary policy after admitting that the priority inflation targets were too easily influenced by events abroad.

A speech given by Reserve Bank of New Zealand (RBNZ) governor Graeme Wheeler on Tuesday has fueled debate over the bank's role as it struggles to deal with the financial risks of an overheated housing market, an overvalued New Zealand dollar and an inflation rate that has been stubbornly tracking near zero.

The RBNZ -- which is charged with ensuring financial stability and maintaining inflation in a target band of 1 percent to 3 percent -- has been forced to impose lending restrictions on commercial banks to contain mortgage risks, while recent cuts to interest rates have had little effect on raising the inflation rate.

Wheeler said in a published speech to businesspeople in Dunedin that the monetary policy challenges extended well beyond the normal parameters and stresses envisaged when policy frameworks were designed and inflation goals were first specified.

The scope and influence of monetary policy, particularly in small, open economies like New Zealand, was heavily constrained by economic and financial developments outside their borders.

"Nearly 10 years on from the Global Financial Crisis, economies face a difficult global economic and financial climate, with below-trend growth despite unprecedented monetary stimulus, declining merchandise trade and rising protectionism, very low inflation and interest rates, and high asset prices presenting financial stability risks," said Wheeler.

"As is the case elsewhere, there are a range of views about what monetary policy can achieve and how it should be operated. In New Zealand, these include a view that flexible inflation targeting is no longer an appropriate framework for conducting monetary policy."

Wheeler said the RBNZ remained committed to flexible inflation targeting as it remained the most appropriate framework for conducting monetary policy in New Zealand.

Provided sufficient flexibility was allowed to accommodate the frequent and often severe impact of external shocks, its most important contribution to promoting efficiency and the long-run growth of incomes, output and employment was the pursuit of price stability.

The RBNZ cut 25 points off the official cash rate -- currently at 2 percent -- earlier this month to lower the risk of a further decline in short-term inflation expectations, he said.

The main opposition Labour Party said Wheeler's speech highlighted evidence that inflation targeting set almost 30 years ago was not sufficient to manage changing global economic conditions.

"Current interest rate settings are helping to push the dollar to nearly its highest point this year -- hurting our hard pressed exporters and slowing the economy. It is time to review monetary policy to ensure it is relevant in the modern world," Labour Party finance spokesperson Grant Robertson said in a statement.

"A review needs to consider widening the focus of the Bank to take factors such as the exchange rate, employment, wages and the overall health of the economy into account when setting the OCR and making its policy decisions." Endit