English sees little advantage in changing Reserve Bank's Policy Targets Agreement from pure inflation targeting to targeting nominal GDP, as proposed in NZIER paper

Finance Minister Bill English speaking to reporters in Parliament on Sept 15, 2015. Photo by Lynn Grieveson for Hive News.

By Bernard Hickey

Finance Minister Bill English has rejected a proposal to shift the Reserve Bank’s Policy Targets Agreement from inflation targeting to nominal GDP targeting, saying he was unconvinced by an idea that was more relevant overseas where interest rates and inflation were closer to zero.

NZIER proposed the change in a paper published this week, arguing the increasing prevalence of supply shocks meant economies could grow without inflation rising so much. These supply shocks raised the risk an inflation-targeting Reserve Bank would be forced to cut interest rates when it was not needed — and in turn dangerously pump up asset prices in the process. Targeting nominal GDP means an economy could grow without inflation and not force interest rate hikes.  See the Interest.co.nz article and the debate over it here.

English told reporters in Parliament today there had been discussion in recent years overseas about moving to nominal GDP targeting because central banks had cut their interest rates to zero and had been forced into unconventional measures such as quantitative easing to try to return inflation to their targets.

“There’s been quite a bit of discussion about that across developed countries over the last few years, but I haven’t seen any distinctive advantage from it for an economy that’s got positive interest rates, and probably a bit more inflation,” English said.

“You’d need a pretty convincing argument to shift away from inflation targeting,” he said.

“It seems to have come up in the context where people think there’s close to zero inflation and central banks haven’t been able to lift it.”

Asked about New Zealand’s annual inflation rate of 0.4% being below the Reserve Bank’s 2% target, he said: “It will be rising as some of those very low quarters drop out. The Reserve Bank forecasts it’s going to head back to 2%.”

CPI inflation has been below 2% for four years and below the 1% bottom of the bank’s 1-3% target range for a year. Core inflation has been below 2% for six years.

Asked if he had asked Treasury or the Reserve Bank for advice on targeting nominal GDP, English said: “There’s been some discussion. I can’t recall asking for formal advice, but because it’s been discussed internationally I’m pretty sure there’s some paperwork there, but nothing I’ve seen that’s convincing.”

‘Not sure on another OCR cut’

English said he was not sure what the Reserve Bank would do with the Official Cash Rate with its Monetary Policy Statement next Thursday. Financial market pricing is evenly split on the prospects for either a fourth cut to 2.5% or it being held at 2.75%, although most economists expect a cut to 2.5%, with two of the big four banks expecting further cuts to 2.0% next year.

“There’s been an expectation that they would lower rates. They’ve said they’ll look at the data. The data seems to have been reasonably positive so I don’t know what they’ll do.”

You were always going to get some short term uncertainty. There would people affected by those measures who won’t invest, but we’ve yet to see how that will flow through. In the long run, our position hasn’t altered and that is we need more supply on the ground, rather than relying on demand contol.