RBNZ Says Monetary Policy Approach In Line With New Fed Strategy

The Reserve Bank of New Zealand sees parallels between the U.S. Federal Reserve’s new monetary policy strategy and its own approach, which allows inflation to run above target for a time after periods of weakness, Assistant Governor Christian Hawkesby said.

“Our observation is that the U.S. Federal Reserve implementing its approach through ‘flexible average inflation targeting’ has a number of parallels with the Monetary Policy Committee’s stated preference to take a ‘least regrets’ approach to achieving its inflation and employment objectives,” Hawkesby said in response to written questions from Bloomberg News. “That is, if inflation has been below the mid-point of the target range for a time, the Committee’s least regret is to set policy where inflation might spend some time above the mid-point of the target range in the future.”

Both the Fed and the RBNZ remain committed to their long term objectives around price stability and employment, Hawkesby said.

The Fed’s new approach to setting U.S. monetary policy is to let inflation and employment run higher, a shift that will likely keep interest rates low for years to come. Chair Jerome Powell said Thursday that the Fed will seek inflation that averages 2% over time, a step that implies allowing for price pressures to overshoot after periods of weakness. It also adjusted its view of full employment to permit labor-market gains to reach more workers.

The new strategy is being undertaken to tackle years of too-low inflation, and gives the central bank flexibility to let the job market run hotter and price pressures float higher before raising rates.

The RBNZ, which pioneered inflation targeting in the 1990s, is also taking a more flexible approach to achieving its policy targets in an environment of structurally subdued price pressures. Inflation has averaged just 1.2% since the start of 2012, well below the 2% midpoint of the central bank’s 1-3% target range.

The RBNZ raised rates in 2014 in anticipation of faster inflation, only to have to reverse course when price gains failed to materialize. Since then it has progressively lowered its official cash rate to 0.25% and launched quantitative easing to cushion the economic blow of the coronavirus pandemic.

Policy makers are now signaling they may take the benchmark rate into negative territory early next year.

©2020 Bloomberg L.P.

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